GLOSSARY

Accelerated Cost Recovery System (ACRS) (Modified)
The Tax Reform Act of 1986 established the modified ACRS tax appreciation system prescribing depreciation methods for each ACRS class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10, 15 or 20-year classes depending on ADR lives.

Add-On
A transaction to add related equipment to an existing lease. Typically, this term is used when the new equipment is financed using the same lease structure (i.e., Fair Market Value, $1.00 Purchase Option, Fixed Purchase Option, etc.) as was used in the underlying transaction except that the lease term for the add-on is set so that it expires coterminously with (on the same date as) the original transaction.

ADR System
A tax depreciation system that establishes the minimum, midpoint and maximum number of years, by asset category, over which an asset can be depreciated. The midpoint life has become synonymous with the term ADR class life”.

Advance Payments
Payments made by the lessee at the inception of a leasing transaction.

Alternative Minimum Tax (AMT)
An alternative, separate tax calculation based on the taxpayer’s regular taxable income, increased by the taxpayer’s preferences for the year. The resulting amount is called the alternative minimum taxable income (AMTI). After certain exemptions and offsets, the taxpayer determines its AMT and is required to pay the larger of the regular tax or alternative minimum tax. Among the preferences that can increase the taxpayer’s AMTI is the accelerated portion of depreciation, thereby making it more likely that a taxpayer that buys equipment may be subject to the AMT rather than to regular tax.

Amortization
A breakdown of periodic loan payments into two components: a principal portion and an interest portion.

Annual Percentage Rate (APR)
The effective rate taking into account compounding and other fees. The nominal rate of interest for a specified period (usually one year).

Arms-Length Transaction
A condition where two parties in a leasing transaction are independent. Looked at by accountants to determine reasonableness of price.

Bargain Purchase Option
An option given to the lessee to purchase the equipment on lease at a price that is less than the expected fair market value so that, at the inception of the lease, it is reasonable to assume that the lessee will definitely purchase equipment on the option date.

Basis Point
One one-hundredth of a percent (.01%).

Buyout
The amount a lessee must pay the lessor to terminate a lease early. Usually calculated to include and past due payments, taxes, unpaid property taxes and lost revenues.

Capital Lease
A lease that meets at least one of the criteria outlined in paragraph 7 of FASB 13 and, therefore, must be treated essentially as a loan for book accounting purposes. The four criteria are:

1. title passes automatically by the end of the lease term
2. lease contains a bargain purchase option (i.e., less than the fair market value)
3. lease term is greater than 75% of estimated economic life of the equipment
4. present value of lease payments is greater than 90% of the equipment’s fair market value.

A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset and corresponding liability (lease payable). Periodic lessee expenses consist of interest on the debt and depreciation of the asset.

Capped Fair Market Value Lease
A Fair Market Value Lease with a predetermined ceiling to limit Fair Market exposure (not-to-exceed amount) at the end of the lease term.

Certificate of Acceptance (Delivery and Acceptance Certificate)
A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

Closed-End Lease
A lease that does not contain a purchase or renewal option, thereby requiring the lessee to return the equipment to the lessor at the end of the initial lease term.

Commitment Fee
A fee required by the lessor at the time a proposal or commitment is accepted by the lessee to lock in a specific lease rate and/or other lease terms.

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 and is entitled to the tax benefits of ownership, such as depreciation. The lessee does not become the legal owner of the asset until all terms and conditions of the agreement have been satisfied.

Coterminous
Two or more leases that are linked so that both will terminate at the same time.

Delivery and Acceptance Certificate (D&A)
A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

Depreciation
A tax deduction representing a reasonable allowance for exhaustion, wear and tear, and obsolescence, that is taken by the owner of the equipment and by which the cost of the equipment is allocated over time. Depreciation decreases the company’s balance sheet assets and is also recorded as an operating expense for each period. Various methods of depreciation are used which alter the number of periods over which the cost is allocated and the amount expensed each period.

Discount Rate
A certain interest rate that is used to bring a series of future cash flows to their present value in order to state them in current, or today’s, dollars. Use of a discount rate removes the time value of money from future cash flows.

Economic Life (Useful Life)
The period of time during which an asset will have economic value and be usable.

End-of-Term Options
Options stated in the lease agreement that gives the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common end-of-term options include purchasing the equipment for $1.00 or a balloon, returning the equipment or extending the lease payments.

Equipment Schedule
A document that describes in detail the equipment being financed. It may also state the financed term, commencement date. Repayment schedule and location of the equipment.

Estimated Useful Life
The period during which an asset is expected to be useful in trade or business.

• used for purposes of calculating the maximum allowable term of a tax lease
• used for determining whether or not the lease is a Capital Lease
• used to determine the method of depreciation for a capitalized leased asset
• may or may not be the same as the life used for income tax purposes

Fair Market Value
The price for which property can be sold in an arms length” transaction; that is, between informed, unrelated, and willing parties, each of which is acting rationally and in its own best interest.

Fair Market Value Lease
A lease which includes an option for the lessee to either renew the lease at a fair market value renewal or purchase the equipment for its fair market value at the end of the lease term. Though often referred to as tax leased, not all Fair Market Value leases qualify as tax leases.

Fair Market Value Purchase Option
An option to purchase the 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.

Finance Lease (Single Investor Lease)
A lease used to finance the purchase of equipment; not a true lease. Finance leases are generally considered to be capital leases from an accounting perspective and non-tax leases from a tax perspective. This is a full-payout, non-cancelable agreement, in which the lessee is responsible for maintenance, taxes and insurance.

Financial Accounting Standards Board 13
Statement number 13 of the Financial Accounting Standards Board (FASB) which establishes standards for lessees’ and lessors’ accounting and reporting for leases. This includes the characterization of a lease as an operating lease or capital lease for the lessee’s purposes.

A company’s assets, liabilities and net income will differ depending on how it chooses to structure its leases. The provisions of FASB 13 derive from the view that a lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the rental of property (operating leases).

If the purchase option is not exercised, then the lease is automatically renewed for a fixed term (typically 12 or 24 months) at a fixed rental intended to approximate fair rental value, which will further reduce the lessor's end-of-term residual position. The lessee is not permitted to return the equipment on the option exercise date. If the lease is automatically renewed, then at the expiration of that initial renewal term, the lessee typically has the right either to return the equipment without penalty or to renew or purchase at fair market value.

Fixed Purchase Option
An option given to the lessee to purchase the leased equipment from the lessor on the option date for a guaranteed price. Both the date and the price must be determined at the inception of the lease. A typical fixed purchase option is 10% of the original cost of the equipment.

Full Payout Lease
A lease in which the total of the lease payments pays back to the lessor entire cost of the equipment including financing, overhead, and a reasonable rate of return, with little or no dependence on a residual value.

Hard Cost
Costs of items that are to be leased that relate to equipment or other parts that will retain value. These items could be taken out of the lessee’s facility and resold.

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.

Incremental Borrowing Rate
The rate that, at the inception of the lease, the lessee would have incurred to borrow over a similar term the funds necessary to purchase the leased asset.

Indenture of Trust (Indenture)
An agreement between the owner trustee and the indenture trustee: The owner trustee mortgages the equipment and assigns the lease and rental payments under the lease as security for amounts due to the lenders. Same as a security agreement or mortgage.

Jobs and Growth Tax Relief Reconciliation Act of 2003
This tax cut passed in May of 2003 allows two different improved depreciation benefits which may significantly reduce the tax liability of company’s purchasing new equipment. The first benefit is Section 179 of the Tax Code and allows an additional write-off of up to $100k based on capital expenditures. The second enhancement is an additional 50% depreciation that may be taken on new equipment during the year it is placed in service. Equipment must be purchased and placed in service by December 31, 2004 in order to qualify for these bonuses. See the Bonus Depreciation Section for additional details.

Lease
A contract through which an owner of equipment (the lessor) conveys the right to use its equipment to another party (the lessee) for a specified period of time (the lease term) for specified periodic payments.

Lease Purchase
Full payout, net leases structured with a term equal to the equipment’s estimated useful life. Because many Lease Purchases include a bargain purchase option for the lessee to purchase the equipment for one dollar at the expiration of the lease, these leases are often referred to as dollar buyout or buck-out leases. Lease Purchases are generally considered to be Capital Leases from an accounting perspective and non-tax leases for a tax perspective due to their bargain purchase option and length of lease term.

Lease Rate (Rental Payment)
The periodic rental payment to a lessor for the use of assets. Others may define lease rate as the implicit interest rate in minimum lease payments.

Lease Rate Factor
Used to calculate monthly payments by multiplying by the amount financed. It is computed using the required interest rate, lease term and end-of-term purchase price.

Lease Schedule
A schedule to a Master Lease agreement describing the leased equipment, rentals and other terms applicable to the equipment.

Lease Term
The fixed, non-cancelable term of the lease. For accounting purposes, includes all periods covered by fixed rate renewal options, which for economic reasons appear likely to be exercised at the inception of the lease.

Lessee
The party to a lease agreement who is obligated to pay the rentals to the lessor and is entitled to use and possess the leased equipment during the lease term. Better known as the customer!

Lessor
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 lease term and is entitled to receive the rental payments.

Master Lease
A continuing lease arrangement whereby additional equipment can be added from time to time merely by describing that equipment in a new lease schedule executed by the parties. The original lease contract terms and conditions apply to all subsequent schedules. To be contrasted with a lease contract for a single transaction involving a specific unit of equipment, a Master Lease is essentially a line of credit to draw from over time in order to purchase equipment.

Municipal Lease
A lease designed to meet the special needs of state and local governments. The lease contains a non-appropriation clause which states that the only condition under which the entity may be released from its payment obligation is when the legislature or funding authority fails to appropriate funds. Since the lessee is a municipality or an organization supporting the government, it is exempt from paying federal income taxes. For this reason, the IRS does not charge the lessor income taxes on leases to these customers.

Net Lease
A lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.

Off Balance Sheet Financing
A lease that qualifies as an Operating Lease for the lessee’s financial accounting purposes. Such leases are referred to as off-balance sheet financing due to their exclusion from the balance sheet asset and debt presentation, except for the portion of the payments that is due in the current fiscal period. Full disclosure of such transactions is typically made in the auditor’s notes to the financial statements. Periodic payments are recorded as expense items on the lessee’s income statement.

Operating Budget
A budget that lists the amount of noncapital goods and services a firm is authorized by management to expend during the operating period.

Operating Lease
A lease which is treated as a true lease (as opposed to a loan) for book accounting purposes. As defined in FASB 13, an operating lease must have all of the following characteristics:

• lease term is less than 75% of estimated economic life of the equipment
• present value of lease payments is less than 90% of the equipment’s fair market value
• lease cannot contain a bargain purchase option (i.e., less than fair market value)
• ownership is retained by the lessor during and after the lease term

An operating lease is accounted for by the lessee without showing an asset (for the equipment) or a liability (for the lease payment obligations) on its balance sheet. Periodic payments are accounted by the lessee as operating expenses of the period.

Patriot Act Section 326
This was enacted after the September 11 th terrorist attacks. It requires the collection and validation of certain data from obligors prior to the disbursement of funds. Information such as complete names, addresses, social security numbers, date of birth, tax identification number is now required to minimize the possibility of future terrorist acts.

Payment in Advance
Periodic payments are due at the beginning of each period.

Payments in Arrears
Periodic payments are due at the end of each period.

Present Value
The discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present Value represents a series of future cash flows expressed in today’s dollars.

Purchase Option
An option given to the lessee to purchase the equipment from the lessor, usually as of a specified date.

Residual Value
The book value that the lessor depreciates a piece of equipment down to during the lease term, typically based on an estimate of the future value, less a safety margin.

Sale-leaseback
A transaction that involves the sale of equipment to a leasing company and a subsequent lease of the same equipment back to the original owner, who continues to use the equipment.

Single Investor Lease (Finance Lease)
A lease used to finance the purchase of equipment; not a true lease. Generally considered to be capital leases from an accounting perspective and non-tax leases from a tax perspective. This is a full-payout, non-cancelable agreement, in which the lessee is responsible for maintenance, taxes and insurance.

Skip-Payment Lease
A lease that contains a payment stream requiring the lessee to make payments only during certain months of the year.

Soft Costs
Cost of items that are to be financed that relate to items other than equipment. Typically these items have no value by the end of the lease term. Typical soft costs include; installation, service, and start-up.

Step-up or Step-down
A feature of a lease that contains payment's that either increas (step-up) or decreas (step-down) in amount over the term of the lease.

Tax-Exempt Entity
Tax-Exempt Entities, for federal income tax purposes, generally include: any federal, state or local government (including their agencies and instrumentalities); any organization that is exempt from federal income taxes, such as non-profit charitable organizations, and most foreign persons or entities, unless a significant portion of their gross income is subject to federal income tax.

Tax Lease
A generic term for a lease in which the lessor takes the risk of ownership (as determined by various IRS pronouncements) and, as the owner, is entitled to the benefits of ownership, including tax benefits.

Trac Lease
A tax-oriented lease of motor vehicles or trailers that contains a terminal rental adjustment clause and otherwise complies with the requirements of the tax laws.

Trustee
A bank or trust company that holds title to or a security interest in leased property for the benefit of the lessee, lessor, and/or creditors of the lessor. A leveraged lease often has two trustees: an owner trustee and an indenture trustee.

Useful Life
The period of time during which an asset will have economic value and be usable. The useful life of an asset is sometimes called the economic life of the asset. To qualify as an operating lease, the property must have a remaining useful life of 25 percent of the original estimated useful life of the leased property at the end of the lease term, and at least a life of one year.

Upgrade
To trade in leased equipment for a newer, more advanced model during the lease term.