Leasing Terms and Glossary

Here are some leasing terms to help you with the leasing decisions:

    Depreciation method that allows for greater deductions or charges in the earlier years of an asset’s depreciable life. These charges become progressively smaller in each successive period.

    An Add-On is just a transaction to add related equipment to an existing lease.

    This term defines one or more lease payments paid to a leasing company at the beginning of the lease term.

    Number of miles you are allowed to drive over the term of the lease. Usually stated on per year basis. You might incur overage charges & have to pay by mile, if you go over your agreed miles.

    Amortization refers to the distribution of the cost of an asset over its life.

    APR or Annual Percentage rate is the effective interest rate you will be charged over the course of a year, taking into account compounding and other fees.

    An appraisal is simply an evaluation of the value of a specific item of Vehicle or equipment.

    Appreciation is the increase in value of an asset or equipment or vehicle over time.

    An asset could be a property, vehicle or equipment or any item of value.

    An audit is a methodical and objective examination of accounts and items that support the financial statements of the company. An audit also requires the CPA to test the books and financial records to see if they are producing reliable financial data. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures.

    A payment that is larger than other payments. A balloon payment is usually the last payment on the lease.

    1 Basis Point equals one hundredth of one percent, used chiefly in expressing differences of interest rates.Example: 100 basis points = 1%.

    The value of the vehicle or equipment according to depreciation schedules, which may or may not be market value.

    Often called the cap cost, this is basically the negotiated price of the vehicle or equipment and all the options.

    It is a document signed by the lessee to acknowledge that the vehicle or equipment to be leased has been delivered and is acceptable.

    It is a written insurance policy statement from an insurance company or its agent.

    It is a vehicle purchase agreement where the lessee is treated as the owner of the asset for federal income tax purposes (thereby being entitled to the tax benefits of ownership such as depreciation), but does not become the legal owner of the asset until all the terms and conditions of the agreement have been satisfied.

    Liabilities that are difficult to quantify. Could also include liabilities that may or may not come to pass, such as outstanding lawsuits.

    The weighted-average cost of funds that a firm secures from both debt and equity sources in order to fund its assets. The use of a firm’s cost of capital is essential in making accurate capital budgeting and project investment decisions.

    The total cost of purchasing raw materials and manufacturing finished goods.

    This is a term used to describe when two or more leases that are related, are slated to terminate on the same date.

    Current Assets include value of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year.

    Current liabilities include the sum of all salaries, interest, accounts payable and other debts due within one year.

    Depreciation is the amount by which a vehicle or equipment loses its value. In leasing, depreciation is the difference between the cost of the new vehicle and the value of the vehicle at the end of the lease. Depreciation decreases the company’s balance sheet assets and is also recorded as an operating expense for each period.

    Discount Rate is the 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.

    This is the amount of money you must pay to begin the lease. Typically, this includes various DMV and leasing fees plus a security deposit.

    Simply means you want to get out of or end the lease contract before all your payments have been made. This can get expensive if there are penalties.

    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 leasing company.

    An ownership interest in equipment or the asset.

    Please check your contract for specifics, but most lease contracts have this clause. It means that the person leasing the vehicle is responsible for the cost of “excess wear and tear” to the vehicle when it is returned.

    FMV or Fair Market Value is the price for which an asset 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.

    A lease that includes an option for the lessee to renew the lease with the equipment value at its fair market value at the end of the lease term.

    A lease used to finance the purchase of equipment and therefore not a true lease. Finance leases are generally considered to be capital leases from an accounting perspective.

    It is an option given to the lessee to purchase the leased equipment from the leasing company on the option date for a guaranteed price.

    A lease in which the total of the lease payments covers the entire cost of the equipment including financing, overhead, and a reasonable rate of return, so that there is little or no residual value.

    Gross Profit = Pre-tax net sales (gross sales minus returns, discounts, and allowances) minus cost of goods sold.

    A guaranty is an agreement that is signed by the officers or principals of the company to answer for the debt or obligation of another if that other party or subsidiary company fails to pay or perform. A parent guaranty refers to those agreed to by companies, while a personal guaranty refers to those agreed to by principals or officers of a company.

    The rate that, at the inception of the lease, the lessee would have incurred if it had borrowed funds over a similar term to purchase the leased asset.

    It’s a contract through which an owner of equipment (the leasing company) conveys the right to use its equipment to another party (the lessee) for a specified period of time (the lease term) for specified periodic rental payments.

    It is a lease line of credit that 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 leasing company. 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 leasing company, the terms and conditions of the Master Lease, and the cost of the equipment.

    Full payout, net leases structured with a term equal to the equipment’s estimated useful life. As 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 considered to be Capital Leases.

    The term is the length of a lease, usually stated in number of months.

    A lease wherein the stream of payments have a debt participant. The ownership of the leased equipment remains with the leasing company.

    A security interest or an encumbrance upon the vehicle.

    Loans with maturity date that is longer than one year.

    This is the person who leases the vehicle for their use.

    The lessor is the company that leases the vehicle to you. The lessor could be a bank or the financial arm of a vehicle manufacturer or even the dealer.

    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.

    This is the interest rate you are charged. It is also called a lease factor or even a lease fee. It is used to calculate your monthly payments.

    This stands for Manufacturer’s Suggested Retail Price.

    A lease designed to meet the special needs of state and/or local governments.

    Cash flows generated through debt and equity financing.

    Cash flows associated with the buying and selling of fixed assets and business interests.

    The sum of net profit, depreciation, change in accruals, and change in accounts payable, minus change in accounts receivable, minus change in inventories.

    Net Income = Gross sales (revenue) minus cost of goods sold, SG&A, taxes, interest, depreciation, and other expenses.

    NPV is 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.

    Total assets minus total liabilities of an individual or company. For a company, also called owner’s equity or shareholders’ equity or net assets.

    In a leveraged lease, the lenders cannot look to the leasing company that sold them the lease for repayment if the lessee fails to meet its payment obligations. The lender’s only recourse is to the lessee and, therefore, the lessee’s credit rating is of prime importance.

    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 that portion of the payments that is due in the current fiscal period.

    A lease that is treated as a true lease for book accounting purposes. An operating lease must have all of the following characteristics: 1) the lease term is less that 75% of estimated economic life of the equipment; 2) the present value of the lease payments is less than 90% of the equipment’s fair market value; 3) the lease cannot contain a bargain purchase option; 4) ownership is retained by the leasing company during and after the lease term. The lessee accounts for an operating lease without showing the equipment as an asset or the lease payment obligations as a liability). For more detailed information, please consult paragraph 7 of FASB 13.

    The residual interest in the assets of an entity that remains after deducting its liabilities.

    This is the amount of money you have to pay to own the vehicle. You might also see it as buyout amount.

    One percentage point (1.00%). Five points represents 5.00%. A point also represents 100 basis points.

    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 at the future fair market value of the lease equipment.

    An offer for purchase of the equipment.

    The requirement to purchase equipment at a particular time and at a predetermined amount. In a lease transaction, this is a leasing company’s right to force the lessee to purchase the equipment at the end of the lease term for that predetermined amount. A lease agreement containing a Put is a Capital lease and not an Operating lease.

    A condition of borrowing money that arises when a leasing company borrows money from another lender to fund a lease and is fully at risk to the lender for repayment of the obligation. The recourse borrower (leasing company) is required to make payments to the lender whether or not the lessee fulfills its obligation under the lease agreement.

    This is the leasing company’s predicted amount of what the vehicle will be worth at the end of the lease. Higher residual value = lower monthly payments.

    Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends but instead reinvested in the core business or used to pay off debt.

    Total dollar amount collected for goods and services provided. Also called gross sales.

    Financial statements accompanied by an accountant’s expression of limited assurance. The accountant communicates this limited assurance in a report by stating that he or she is not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with Generally Accepted Accounting Principles. The accountant must perform sufficient inquiry and procedures to give a reasonable basis for that conclusion, but doesn’t have to independently verify the accuracy of the data as long as it looks reasonable.

    A transaction where the owner sells the equipment it already owns to a leasing company, which then leases it back to the same original owner who now becomes the lessee in the transaction. This structure is often used to raise cash or to take the transaction off balance sheet.

    You pay tax only on the amount of the vehicle’s value you are using.

    A deposit of funds. It is usually equal to one monthly payment.

    Total assets minus total liabilities; a company’s net worth is the same thing.

    Debt obligations, recorded as current liabilities, requiring payment within the year; often used to refer to the current portion of bonds or loans.

    Defined as any cost above the equipment cost. Examples of this could be software, shipping, installation, hardware, warranty, and labour

    Sometimes manufacturers might offer a low interest rate or inflate the residual value of the vehicle. The result is the same – lower monthly payment for you.

    Economic resources with future benefit that are used in the normal operating activity of the organization that can be physically observed, e.g., land, buildings, vehicles and equipment.

    A special type of lease where the lessee guarantees the residual value to the leasing company and the lease is treated as a true lease for tax purposes. TRAC leases can only be used for motor vehicles, such as trucks or trailers.

    All items of economic value owned by an individual or corporation, especially that which could be converted to cash, including, but not limited to, cash, securities, accounts receivable, inventory, equipment, buildings, vehicles, and other properties. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings.

    All financial obligations, debts, claims, or potential losses.

    Also known as an operating lease, where the leasing company qualifies for the tax benefits of ownership and the lessee is allowed to claim the entire amount of the lease rental as a tax deduction.

    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.

    Vendor is usually a 3rd party that provides the equipment in a lease transaction.

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


    Please note that this is by no means a complete list of terms. Some of the terms may need more explanation. We hope that this serves as a good start to help you familiarize with some of the lease terms.


     

     

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