Leasing 101: Glossary
One or more lease payments must be paid to the lessor at the beginning of the
lease term. This term also refers to leasing arrangements in which the lease
payment is due at the beginning of each period.
The process for separating payments into their principal and interest components.
An amortized loan is one in which the principal amount of the loan is repaid
in installments over the life of the loan with each payment comprised partially
of interest and principal.
A lease receivable that is written off because of the lesseeUs unwillingness
or inability to pay.
An action taken by a debtor to legally protect its remaining assets by declaring
that it cannot pay its bills. Liabilities typically exceed assets in such a
The initial, noncancelable term of the lease used by the lessor in computing
the payment. The base term is the minimum time period during which the lessee
has the use and custody of the equipment.
The amount a lessee must pay the lessor to terminate a lease early. It usually
includes tax recapture, unpaid property taxes and lost revenues.
certain criteria established by Financial Accounting Standards Board Statement
No.13 (FASB). Such a lease must be shown as an asset and related obligation
on the balance sheet of the lessee.
A leasing company set up by a manufacturer or equipment dealer to finance the
sale or lease of its products to end users/lessees.
Certificate of Delivery and Acceptance
A document signed by the lessee to acknowledge the equipment to be leased has
been delivered and is acceptable. The actual lease term commences when this
document is signed.
Equipment or other tangible asset such as a house, car or security pledged by
the lessee to the lessor to minimize the risk of default.
Conditional Sales Contract
An agreement for the purchase of an asset in which the lessee is treated as
the owner of the asset for federal income tax purposes. The lessee does not
become the legal owner of the asset until all terms and conditions of the agreement
have been satisfied.
A means for a firm to recover the cost of purchased assets over time through
periodic deductions or offsets to income. Depreciation is used for both financial
reporting and taxes. It is considered a tax benefit because the depreciation
deductions reduce taxable income, lowering the firmUs tax liability.
Occurs when the lessee returns the leased equipment to the lessor prior to the
end of the lease term. Early termination may result in a penalty to the lessee.
Options in the lease agreement that give the lessee flexibility in its treatment
of the leased equipment at the end of the lease term. Common end-of-lease options
include purchasing the equipment from the lessor, extending the lease term,
and returning the equipment to the lessor.
A document incorporated by reference into the lease agreement. The schedule
states the lease term, commencement date, repayment schedule and location of
The value of a piece of equipment if it were to be sold in an arm-length transaction
between a willing buyer and seller.
Typically a finance lease is a full-payout, noncancelable agreement in which
the lessee is responsible for maintenance, taxes and insurance.
Financial Accounting Standards Board (FASB)
The rule-making body that establishes financial reporting guidelines. Financial
Accounting Standards Board Statement No. 13, Accounting for Leases. FASB 13,
along with its various amendments and interpretations, specifies the proper
classification, accounting and reporting of leases by lessors and lessees.
Fixed Purchase Option
An option in the lease agreement allowing the lessee to purchase the equipment
at a predetermined price at the end of the lease term.
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
on the leased equipmentUs residual value.
A contract in which an owner of equipment conveys the right to use the equipment
to another party for a specific period of time at a predetermined rate.
The contractual agreement between the lessor and the lessee that sets forth
all the terms and conditions of the lease.
Also called rentals. The amount the lessee pays the lessor in return for using
the leased equipment
Lease Rate Factor
A percentage amount that, when multiplied by the original equipment cost, produces
the monthly rental.
Lease Renewal Option
An option in the lease agreement that allows the lessee to extend the lease
beyond expiration of the initial lease term in exchange for renewal payments.
The fixed, noncancelable term of lease.
The user of the equipment being leased.
The lender of the equipment being leased.
A lease agreement containing boiler plate provisions that allows a lessee to
obtain additional leased equipment under the same basic lease terms and conditions
originally agreed upon. A master lease obviates the need to renegotiate and
execute a new lease contract with the lessor. The actual lease rate for a specific
piece of equipment generally will be set upon equipment delivery to the lessee.
A lease in which all costs in connection with the use of the equipment, such
as maintenance, insurance and property taxes, are paid for separately by the
lessee and are not included in the lease rental paid to the lessor.
Non Tax Lease
A lease in which the lessee is or will become the owner of the leased equipment.
The lessee bears all the risks and, therefore, is entitled to the benefits (including
tax benefits) of equipment ownership.
Off-Balance Sheet Financing
Any form of financing, such as an operating lease, that is not required to be
reported on a firmUs balance sheet.
A lease that has the characteristics of a usage agreement and also meets certain
criteria established by the FASB. Such a lease in not required to be shown on
the balance sheet of the lessee.
Occurs when the lessee purchases the leased asset from the lessor prior to the
end of the lease term.
An option in the lease agreement that allows the lessee to purchase the leased
equipment at the end of the lease term for either a fixed amount or the future
fair market value of the leased equipment.
Refundable Security Option
An amount paid by the lessee to the lessor as security for fulfillment of all
obligations in the lease agreement. The deposit is refunded to the lessee once
all obligations have been satisfied. Security deposits typically are returned
at the end of the lease term but can be refunded at any point during the lease
upon mutual agreement.
An option in the lease agreement that allows the lessee to extend the lease
term for an additional period beyond the expiration of the initial lease term,
in exchange for lease renewal payments.
The value, actual or expected, of leased equipment at the end, or termination,
of the lease.
A listing of equipment subject to a lease that describes the equipment in detail.
The schedule may reflect the lease term, payment, commencement date and equipment
location, and may be incorporated into the basic lease agreement by reference.
A lease requiring the lessee to make payments only during certain periods of
A portion of the overall leasing market that focuses on leasing lower-priced
equipment. The cut-off point between the small-ticket and middle markets ranges
from $100,000 to $250,000 per lease, depending on the individual firmUs interpretation.
Uniform Commercial Code (UCC)
A document under the UCC is filed with the county (and sometimes with the secretary
of state) to provide public notice of the lessorUs security interest in personal
An option that allows the lessee to add or replace an existing piece of leased
equipment to increase its capacity or efficiency.