An add-on is a type of transaction that adds related equipment to an existing lease. Typically, the term add-on is used when this additional equipment is being financed using the same terms – such as Fair market value, or $1.00 purchase option that were used for the original transaction. The only difference is that the length of the add-on is not the same as that of the original transaction. It is almost always a shorter period of time, expiring on the same date (that is, coterminous) as the lease for the original transaction.
Often used in connection with real estate financing, the term amortization refers to the breakdown of periodic loan payments into their two components: the portion of the payment that reduces the principal owed, and the portion that reduces the interest owed on the remaining balance.
Annual percentage rate, or APR
The term Annual percentage rate or APR indicates the true, or effective, rate of interest being paid on a loan when compounding of interest and the costs of various fees are taken into account. The term typically identifies the actual rate of interest being paid for a specified period, usually one year.
The term application number number assigned to an application after it has been completed and submitted by the lessee.
Bargain purchase option
The term bargain purchase option refers to an option given to the customer leasing the equipment. Typically, this option gives that customer the right to purchase the equipment, on lease, at a bargain price-a price lower than the expected fair market value.
A basis point is a unit of measurement equal to 1/100th of a percent. Using this definition, 125 basis points equals 1.25 percent.
The term Buyout indicates the amount a customer leasing the equipment must pay in order to terminate the lease in advance of the expiration date. This amount is calculated to include recapture of taxes paid, unpaid property taxes, and lost revenues.
A capital Lease meets at least one of the following criteria:
- The Lease transfers ownership of the property to the lessee, by the end of the lease term.
- The Lease contains a bargain purchase option.
- The Lease term is equal to 75 percent or more of the estimated useful life of the leased property.
- The present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90 percent of the property fair market value at the start of the lease.
Therefore, the lease must be treated as a loan for accounting purposes.
The customer leasing the equipment under a capital lease typically treats it, first, as the borrowing of funds; and, second, as the acquisition of an asset to be depreciated. As a result, the individual or organization records a capital lease as both an asset and a corresponding liability-a lease payable.
Periodic expenses incurred by that person or organization consist of interest on the debt and depreciation of the asset.
The term Coterminous refers to two or more leases that are linked so that both will terminate on the same date.
Depreciation is a tax deduction representing a reasonable allowance for exhaustion, wear and tear, and obsolescence. This type of deduction is claimed by the owner of the equipment so that the cost of the equipment can be allocated over a longer period of time. Depreciation lowers the company’s balance sheet assets and also is recorded as an operating expense over that extended period.
Fair market value
The term fair market value is defined as the price for which property can be sold in an “arm’s length” transaction-one that occurs between informed, unrelated, and willing parties, each of whom is acting rationally and in his/her/their own best interest.
Fair market value lease
This type of lease includes an option through which the person or company leasing the equipment has three choices. The individual or organization may either renew the lease at a fair market value renewal rate; purchase the equipment for its fair market value at the end of the lease term; or return the equipment. Though often referred to as tax leases, not all fair market value leases offer the same features or benefits that tax leases do.
A lease of this type is used to finance the purchase of equipment; it is not, therefore, a true lease. From an accounting perspective, finance leases generally are considered capital leases; while from a tax point of view, they are considered non-tax leases.
Fixed purchase option
This is an option that allows the customer to purchase the equipment at the end of the lease term for a fixed percent of the original purchase cost. A typical fixed purchase option is 10% of the original purchase cost.
Incremental borrowing rate
The term incremental borrowing rate refers to the rate the customer leasing the equipment would have paid if the equipment had been purchased outright rather than leased, determined at the date of the inception of the equipment lease.
A lease is a contract through which the owner of equipment conveys the right to use its equipment to another party for a specified period of time (the lease term) for specified periodic payments.
Lease purchase agreements
These are full-payout net leases with a term reflecting the equipment’s estimated useful life. Because many lease purchase agreements include a bargain purchase option-providing for the purchase of the equipment for $1 at the expiration of the lease-lease purchase agreements often are referred to as ‘dollar-buyout’ or ‘buck-out’ leases. Lease purchase agreements generally are considered capital leases from an accounting perspective and non-tax leases from a tax perspective, due to their bargain purchase option features and the length of their terms.
The term lease schedule refers to the schedule attached to a master lease agreement, describing the leased equipment, rentals, lease term, and other terms applicable to the lease.
A lessee is the party to a lease agreement who is obligated to pay rental instalments to the lessor and is entitled to use and possess the leased equipment during the lease term.
The lessor is the party to a lease agreement who has legal or tax title to the equipment (in the case of a true tax lease); grants the lessee the right to use the equipment for the term of the lease; and is entitled to receive all rental payments.
A master lease is a continuing lease arrangement-in which all terms and conditions of the original lease remain in force-permitting additional equipment to be added to the lease merely by describing such equipment in a new lease schedule executed by the parties to the original master lease.
This term refers to a leasing arrangement that qualifies as an operating lease for the financial accounting purposes of the person or company leasing the equipment. Such leases are described as ‘off-balance-sheet financing‘ because they’re not included in the traditional balance sheet asset and debt presentation-except for that portion of each payment that is due in the current fiscal period. Full disclosure of these transactions typically is provided in an auditor’s notes on financial statements. Periodic payments are recorded as expense items on the income statement of the person or company leasing the equipment.
This lease is treated as a true lease-rather than as a loan-for accounting purposes. An operating lease is accounted for on balance sheets without showing the equipment as an asset or the lease payment obligations as a liability. Periodic payments are accounted for by the customer leasing the equipment as operating expenses for the period.
Payment in advance
The term Payment in advance refers to the periodic payments due at the beginning of each period.
Payment in arrears
The term payment in arrears refers to the periodic payments due at the end of each period.
Present value is the discounted value of a payment or stream of payments that will be received in the future, predicated on a specific interest or discount rate. Present value represents a series of future cash flows expressed in terms of today’s dollars.
A Purchase Option is an option that permits the customer leasing the equipment to purchase it outright from the owner, usually as of a specified date.
Purchase upon termination lease
Purchase upon termination lease, commonly referred to as a PUT, is an agreement by the lessee to purchase the property at the end of the lease term for a fixed amount.
The term residual value refers to the book value to which a piece of equipment is depreciated during the lease term, typically based on an estimate of future value, minus an amount that provides a safety margin.
The term sale leaseback represents a type of transaction involving the sale of equipment to a leasing company and the subsequent leasing of the same equipment to the original owner, who continues to use the equipment.
A Skip payment lease type of lease contains a payment stream requiring the person or company leasing the equipment to make payments only during certain periods of the year.
Step-up or step-down
A lease feature that provides for a payment stream where individual payments may increase (step-up) or decrease (step-down) over the term of the lease.
Tax Lease is a generic term for a lease in which the owner of the equipment assumes the risks of ownership, and is thus entitled to the benefits of ownership, including tax benefits.
The term transaction number is the number assigned to an application prior to being completed by the lessee (also known as “partial application”). The transaction will be assigned an Application Number once the lessee has approved and submitted the completed application. This Application Number will then be used for tracking a lease through the approval and funding process.
This term-used interchangeably with the term ‘economic life’-refers to the period of time during which an asset is usable and has economic value. To qualify as an operating lease, the property must have, at the end of the lease term, a remaining useful life of 25 percent of its original estimated useful life-a useful life of at least one year.
The term upgrade is referring to a trade-in of leased equipment, during the term of the lease, for a newer, more advanced model.