Liberty Leasing - Equipment Leasing, Equipment Financing, Business Financing

Liberty Leasing Services, Inc. understands that leasing terminology can be confusing and as a service to our prospective and current clients provides the following glossary of common terms. Should you have any questions regarding leasing terminology we encourage you to contact us or consult with your business advisor.

Accelerated Depreciation: Any depreciation method that allows for greater deductions or charges in the earlier years of an asset's depreciable life, with charges becoming progressively smaller in each successive period. Examples of accelerated depreciation are the double declining balance and sum-of-the-years digits methods.

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

Advance Rental Payments: The initial payment or payments made by the lessee at the beginning of the lease agreement (i.e. the first rental payment or first and last rental payment).

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).

Appreciation: The increase in value of an asset over time.

Asset: An item (tangible or intangible) of value.

Assignment of Proceeds: Under an Assignment of Proceeds agreement, the vendor agrees to let the lessor fund the manufacturer's equipment costs directly to the manufacturer at the time of funding.

Balloon Payment: A payment on a lease that is large in comparison to the other payments. A balloon payment is usually the last payment on the lease.

Bargain Purchase Option: A lease provision allowing the lessee, at its option, to purchase the leased property at the end of the lease term for a price that is sufficiently lower than the expected fair market value of the property.

Basis: For tax purposes, the value of an asset after subtracting any applicable accumulated depreciation from the original acquisition cost of the asset.

Basis Points: Units of 1% with each unit equal to 0.01% (1/100%). For example, "50 basis points" is equal to .5% and "200 basis points" is equal to 2%.

Book Value: For accounting purposes, the value of an asset after subtracting any applicable accumulated depreciation from the original acquisition cost of the asset.

Capital Lease (also known as a Finance Lease): A lease that meets at least one of the criteria outlined in paragraph 7 of Financial Accounting Standards Board Pronouncement Number 13 (FASB 13). A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset to be depreciated; thus the lease is recorded on the lessee's balance sheet as 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 at the end of the lease term.

Certificate of Delivery and Acceptance: A document that is signed by the lessee to acknowledge that the equipment to be leased has been delivered and is acceptable.

Certificate of Insurance: A statement from an insurance company or its agent that a certain policy has been written. The certificate usually summarizes the coverage of a certain policy.

Commitment Deposit: A deposit required by the lessor at time of signing which ranges from 1-2% of the total equipment cost, or the equivalent of the first rental payment. It is generally applied to rental on a pro rata basis if the commitment is taken down or returned if the lease is declined.

Commitment Letter: The letter prepared by the lessor to spell out terms and conditions between lessee and lessor for a master lease line of credit.

Coterminous: Linking two or more lease agreements together so they terminate at the same time.

Dealer Lease Referral Application and Agreement: This one page agreement supplies the lessor with important information about the equipment vendor. By way of this agreement, the vendor concurs to pass clear title to the equipment to the lessor on delivery and acceptance by the lessee and funding by the lessor.

Depreciation: An expense or 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: An interest rate that is used to bring a series of cash flows to their present value in order to state them in current, or today's dollars.

Early Termination: The termination of a lease before the end of its original term. Depending on the lease structure, an Early Termination may have consequences such as a final payoff consisting of the sum of the remaining payments discounted at a nominal rate and a penalty.

Economic Life: The estimated period of time, with normal repairs and maintenance, that equipment is expected to be economically usable for the purpose for which it was intended at the inception of the lease.

Electronic Funds Transfer (EFT - also known as ACH): An electronic transfer of cash whereby the sender remits payment directly to the recipient's bank account.

End-of-Term Options: Options stated 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-term options include purchasing the equipment, renewing the lease or returning the equipment to the lessor.

Equipment Schedule/Lease Schedule: A document incorporated by reference into a lease agreement, which describes in detail the equipment being leased. The schedule may state the lease term, commencement date, repayment schedule and location of the equipment

Fair Market Value (FMV): 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 Renewal Value: The rental payment paid monthly for a period of up to one year if the lessee elects to renew the lease once it has initially terminated. The value is determined by negotiation between lessee and lessor and represents the Fair Market Rental/Renewal Value.

Finance Lease (also knows as a Capital Lease): A lease that meets at least one of the criteria outlined in paragraph 7 of Financial Accounting Standards Board Pronouncement Number 13 (FASB 13). A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset to be depreciated; thus the lease is recorded on the lessee's balance sheet as an asset and corresponding liability (lease payable). Periodic lessee expenses consist of interest on the debt and depreciation of the asset.

Financial Accounting Standards Board Pronouncement Number 13 (FASB 13): A pronouncement from the Financial Accounting Standard Board which outlines the accounting treatment of leasing transactions under United States generally accepted accounting principals. The pronouncement specifically addresses the definition and accounting treatment for capital leases.

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 paid to the lessor covers the entire cost of the equipment including financing, overhead, and a reasonable rate of return for the lessor, with little or no dependence on the residual value.

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

Landlord Waiver: A document created by the lessor and signed by the lessee's landlord. The signed document gives up any rights the lessee's landlord may have in the leased equipment at the lessee's place of business. This waiver lets the lessor remove the equipment in case of default or at completion of the lease. It also protects the lessor in situations where leased equipment is in conjunction with real property.

Lease: A legal contract granting use or occupation of property during a specified period of time in exchange for a specified payment of rent.

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

Lease Line: A lease line of credit allows a leasing customer to obtain additional leased equipment under the same basic lease terms and conditions originally agreed to without having to re-negotiate and execute a new lease contract with the lessor. Each new piece of equipment is listed on a separate schedule, and the specific lease rate for that schedule is dependent upon the policies of the lessor, the terms and conditions of the Master Lease, and the cost of the equipment.

Lease Commencement: The date the equipment is accepted by the lessee as evidenced by lessee's execution of a Certificate of Delivery and Acceptance.

Lease Proposal: A written document between the lessor and lessee that details the basic terms and conditions of a lease transaction. Both parties sign this proposal and it is then reviewed for credit approval.

Lease Rate: The simple corresponding interest rate less depreciation and residual, if any.

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

Lease Term: The period of time covered by the lease agreement, usually stated in number of months.

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.

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.

Leveraged Lease: A lease wherein the stream of payments have a debt participant. The ownership of the leased equipment remains with the lessor. Leveraged Leases can be either recourse or non-recourse leases.

Level Payments: Equal periodic rental payments for the term of the lease agreement.

Lien: A security interest or an encumbrance upon property.

Long Term Debt: Loans and obligations with a maturity of longer than one year; usually accompanied by a portion (current portion of Long Term Debt) with a maturity of less than one year.

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. Eliminates signing new leases as additional equipment is leased.

Municipal Lease: A lease designed to meet the special needs of U.S. 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 lessee's.

Net Lease: A type of lease agreement where all costs associated with the use of the equipment are paid by the lessee and are not an element of the rental payment. For example, insurance, taxes and maintenance are paid directly by the lessee in a Net Lease.

Operating Lease: A lease that does not meet any of the criteria outlined in paragraph 7 of Financial Accounting Standards Board Pronouncement Number 13 (FASB 13). The lessee shall treat the lease payment as an expense in the period incurred with no subsequent recording of an asset or liability on its balance sheet, hence, the term "off-balance sheet" financing.

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

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

Pre-Funding: A term used when an equipment vendor requires that they be paid a percentage of the equipment cost before the lessee has executed a Delivery and Acceptance Certificate. The lessor must approve this arrangement at the time a lease application is submitted and generally requires the execution of additional legal documents.

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 in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease term for either a negotiated or pre-determined amount.

Purchase Order: A document indicating the terms and conditions upon which the buyer of the equipment (lessor) will pay the sellers (equipment vendor) invoice the agreed upon purchase price of the equipment.

Residual: The value of the leased property at the end of the lease term as estimated at the time of Lease Commencement.

Residual Value: The lessor's reported book value of the Residual at a specific point in time during the lease contract.

Sale Leaseback: A transaction where the owner sells equipment it already owns to a lessor then leases it back from the lessor thereby becoming the lessee. This structure is often used to raise cash or to take the transaction off-balance sheet.

Security Deposit: Payment or payments made by the lessee at the beginning of the lease agreement. This deposit is held by the lessor for the term of the lease agreement. If the lease agreement terms are not fulfilled for reasons that are not the fault of the lessor, the deposit will be retained by the lessor to offset losses for administrative costs. If any amount of the deposit remains at the end of the Lease term and the lessee has finalized all of his / her obligations under the lease agreement, the Security Deposit will be returned to the lessee or can be applied to the Purchase Option or to any outstanding payments.

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

Step-up or Step-down: A feature of a lease that contains a payment stream that either increases (step-up) or decreases (step-down) in amount over the term of the lease.

Soft Costs: Additional costs added to the equipment cost to be included in the determination of the lease payment. Installation expenses, software, freight and other items are often defined as soft costs.

Tax Lease: A lease that qualifies under specific revenue rulings of the United States Internal Revenue Code for the entire rental payment amount to be deducted from the taxpayer's taxable income during the tax period incurred.

Uniform Commercial Code: A standardized program and method within the United States of legalizing, administering, and recording lien instruments. Adopted now by every state except Louisiana.

Useful Life: An estimated amount of time during which an asset or facility will yield income or be useful.

Vendor: The party that provides the equipment in a lease transaction.

Yield: The rate of return to the leasing company in a lease transaction.

Leasing Glossary