Leases are full of terms nobody uses in day-to-day speech. You should know what you're reading if you're planning on signing a lease. With that in mind, we've compiled a...
Active Lease: A lease which has been approved, signed and activated and whose initial lease term has not yet expired. This is the period during which rent is billed.
Bargain Purchase Option: A lease provision which gives the lessee the option to purchase the equipment at the end of the lease term for a price set at the start of the lease. This price is usually substantially lower than the fair market value of the item at the date the option can be exercised, and is often as low as ten dollars!
Broker: A company or person who, for a fee, arranges transactions between lessees and lessors.
Buy-Out (also Pay-Out): The purchase of leased equipment by the lessee during the term or upon expiry of the lease.
Capital Cost Allowance: An amount (expressed as a percentage) allowed to be expensed for tax purposes against the cost of capital assets acquired by a business. Different types of assets attract different percentages. Using this CCA or passing it on to a leasing company in exchange for the ability to expense lease payments is one of the main determinants in deciding whether or not to lease.
Closed-End Lease: A lease under which the lessee is not expected or required to exercise an option to purchase the leased equipment. These leases are most often found in automobile leases from dealers and manufacturers. At the end of the lease the vehicle may be returned subject to mileage and condition-of-vehicle restrictions.
Collateral: Any property designated as security for the payment of a debt or for execution of a contract.
Commencement Date: A lease has commenced when all the equipment is installed and up and running to the lessee's satisfaction.
Conditional Sale: A purchase agreement that presumes the customer to be the owner of the equipment immediately upon signature - provided all payments and conditions are met. (This contract allows immediate ownership for tax treatment and gives the seller a security interest until payments are completed.)
Credit: The power to obtain money, materials or service by promising to pay for them at some definite future date. Want credit? Apply here.
Credit Bureau Report: A report from a credit service such as TRW or Equifax which summarizes an individual's credit history with retail establishments and financial institutions.
Credit Investigation: The process of gathering and verifying the references provided by a prospective lessee (for example, obtaining credit reports, checking bank and trade references, etc.)
Default: Failure to carry out a legally binding promise.
Delivery & Acceptance: A receipt signed by the lessee to certify that the equipment has been delivered, installed and is operating properly. D&A certification is usually necessary for the equipment vendor to receive payment and the terms of the lease begin.
Economic Life (Useful Life): The period of time during which an asset will have economic value and be useful.
Effective Lease Rate: The effective rate (to the lessee) of cash flows resulting from a lease transaction. To compare this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities.
Equipment Schedule: A document that describes in detail the equipment being leased. It may also state the lease term, commencement date, repayment schedule and location of the equipment. The lease agreement itself then is incorporated into a Master Lease to which the schedule(s) is deemed attached.
Expiration/Expiry Date: The date the original lease term ends.
Fair Market Purchase Option: An option to purchase leased property at the end of the lease term at its then fair market value. The lessor does not have the ability to retain title to the equipment if the lessee chooses to exercise the purchase option.
Fair Market Value: The price for equipment that a buyer would be willing to pay a seller in the open market.
Finance Lease: A lease that extends through the major portion of the equipment's useful life. The lesses assumes the risk and responsibilities of ownership over the duration of the lease and usually has the option to purchase the equipment for a nominal amount at the end of the lease.
Financial Statements: Reports, usually a balance sheet and an income statement, which show the financial position of a business for specific time period, and the operating results by which it arrived at this position.
Full Payout Lease: A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.
Guarantor: A person or business promising to perform all lessee obligations - including making payments - should the lessee fail to do so.
Guarantee: A written promise by one party to perform some duty or pay a debt if another party should fail to do so.
Hell-or-High-Water Clause: A clause in a lease that reiterates the unconditional obligation of the lessee to pay rent for the entire term of the lease, regardless of any event affecting the equipment or any change in the circumstances of the lessee.
Indemnity Clause: A clause in which the lessee indemnifies the lessor from loss of tax benefits or from tax liabilities or other defined risks the lessor would not otherwise incur.
Initial Payment: A cheque for the first period's rental; some monies to be exchanged to bind the contract.
Lease: A contract between a lessor who owns the asset and the lessee who uses the asset, where the lessor provides temporary possession and full use of the asset to the lessee, for a specified period of time, in exchange for rental payments.
Lease Assignment: The lessor signs the lease to another party giving the assignee the rights, power, privileges and remedies specified in the lease.
Lease Rate (Rental Payments): The periodic rental payment of the cost to a lessor for the use of assets.
Lessee: The individual or entity leasing the equipment.
Lessor: The party holding the title for the equipment (the leasing company) and conveys the right to its use to the lessee.
Operating Lease: A lease in which the lessor, in determining the lease rates, projects that the equipment will have a necessary market value at lease-end to provide for an adequate rate of return.
Payout/Buyout: A right given to the lessee by the lessor. The sum of all the remaining payments less the unearned interest. The equipment is then returned.
Personal Guarantee: A written agreement by a third party to be responsible for the lease payments in the event that the original lessee defaults.
Pre-Authorized Payment: A system used to transfer funds electronically through a clearinghouse facility directly into the payee's bank account.
Present Value: Refers to today's value of money to be received in the future. For example, how much is the right to receive $10,000 in five years worth today?
Purchase Option: A right given by the lessor to the lessee under a lease to continue using the equipment for a further period of time, for an agreed-upon rental payment, after the expiry of the original term of the lease.
Put Option: The requirement to purchase equipment at a particular time and at a predetermined price. In a lease transaction, this is a lessor's right to force the lessee (or some third party) to purchase the equipment at the end of the lease term.
Sale-Leaseback: An arrangement under which equipment is purchased by a lessor from the company owning and using it. The lessor then becomes the owner and leases it back to the original owner, who continues to use the equipment.
Stretch Lease: A lease in which the lessee may either exercise the purchase option at the option time specified in the contract, or continue to make rental payments for the remaining term of the contract.
Trade-Up/Upgrade: Exchanging equipment and entering into a new lease obligation.
True Lease: The lessee expenses the entire lease payment and cannot capitalize the asset for tax purposes. No early purchase option is stated. Fair Market Value is only quoted at lease maturity. A transaction recognized in law and by tax authorities as providing the lessor with the benefits and risks of ownership - with the basic qualification that the lessee may not build an equity position in the asset during the term of the lease.
Vendor: The seller of the equipment to the lessor for lease to a third party (lessee).
Vendor Leasing: A working relationship between a financing source and a vendor to provide financing to stimulate the vendor's sales. The financing source offers leases or conditional sales contracts to the vendor's customers. The vendor leasing firm substitutes as the captive finance company of a manufacturer or distributor through the extension of leasing to customers, provisions of credit checking, and performance of collections and operational administration. Also known as lease asset servicing or vendor programs.
Types of Leases
Standard Lease: The lease provides an expiry option to the lessee for generally 10% of the original equipment cost. This is an option ONLY as the lessee also has the option to return the equipment with no further obligation.
Stretch Lease: The lease provides the lessee an option to purchase the equipment at a date prior to expiry for a specified amount. It is up to the lessee to notify the lessor in writing that they want to exercise their early option. If no notification is received, the lease continues to the full term and is treated as a standard lease.
FMV Lease: The lease provides an expiry option to the lessee for Fair Market Value to be determined at the time of expiry. This is an option ONLY as the lessee also has the option to return the equipment with no further obligation. Fair Market Value leases cannot be written as a stretch lease, nor can they contain more than 20% soft costs like software, licensing, training, cabling, shipping etc.
Residual Lease: Leases with a specific value of the equipment determined at the expiry of the lease. Periodic paym,ents are calculated based on the said residual amount which provides a lower periodic payment. Generaly, residual leases are for NEW equipment only. Residual leases cannot be written as stretch leases.
