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Lease Terminology
Closed End Lease
A lease whereby the lessee is committed to paying only monthly
rentals and has no commitment at the termination of the lease.
Conditional Sale
A transaction for purchase of an asset in which the user, for
federal income tax purposes, is treated as the owner of the
asset at the outset of the transaction.
Fair Market Value
The price for which property could be sold in an arm's-length
transaction between unrelated parties.
Finance Lease
A financing device whereby a user can acquire use of an asset
for most of its useful life. Rentals are net to the lessor and
the user is responsible for maintenance, taxes, and insurance.
A finance lease may be either a true lease or a conditional
sale.
Full Payout Lease
Lease in which the cash flow will return to the lessor the
acquisition cost of the asset, the cost of financing overhead,
and an acceptable return on the investment. Under a non-payout
lease, the lessor depends on an unguaranteed portion of the
residual value of the asset to recover the asset cost plus
return-on-investment.
Lessee
An individual, company, or business firm contracting for the
use of property that is owned by the lessor and paying for
that use in the form of rentals.
Lessor
The legal owner of property which is being leased to a lessee
in return for rental payments.
Master Lease
An open-end or blanket-type arrangement under which a lessee
obtains the use of assets, and can also acquire later, at its
discretion, other equipment at a predetermined rate and under
the same basic terms without negotiating a new contract.
Net Lease
In a net lease, all costs in connection with the use of the
property are to be paid by the lessee and are not a part of
the rental: for example, taxes, insurance, and maintenance are
paid directly by the lessee. Most finance leases are net
leases.
Non-cancellable Lease
A lease which is cancelable (i) only upon the occurrence of
some remote contingency, (ii) only with the permission of the
lessor, (iii) only if the lessee enters into a new lease with
the same less, or *iv) only upon payment by the lessee of a
penalty in an amount such that continuation of the lease
appears, at inception, reasonably assured.
Operating Lease
A transaction in which the lessor provides specific services,
such as insurance and maintenance, as well as financing. The
number of services provided by the lessor are generally
negotiable and vary in each transaction. Operating leases are
non-payout.
Put
An agreement by which a party guarantees to purchase the
property from the lessor at the termination of the contract
for a prearranged price.
Sale and Leaseback
An arrangement through which a company sells fixed assets for
cash and retains their use by leasing them back from the buyer
(Lessor).
Residual Value The value of property at the termination of the
lease.
True Lease
A transaction that is recognized both in law and by tax
authorities as providing the lessor with the benefits and
risks of ownership. A true lease may be either non-payout or
full payout. A basic qualification of a true lease is that the
lessee may not build an equity position in the asset during
the lease term.
Useful Life
The period of time during which an asset will have economic
value and be usable. Useful life of an asset is sometimes
called the economic life of an asset.
"End of Lease" Options
The "End of Lease" options are
determined at the origination of the lease. Your choice can
have an effect on the payment amount.
Fair Market
Value
At the end of the
lease you have the option of buying the leased property for
the Fair Market Value. This is considered an operating lease
(Operating Lease--the end of lease market value cannot be
predetermined nor can the certainty of exercising a purchase
option at the end of the lease). This option tends to yield
the lowest monthly payment.
$1.00 Purchase Option
At the end of the lease you have the option of buying leased
property for $1.00 and title passing to lessee. This is
considered a Finance lease. Tends to yield the highest monthly
payment.
10% Purchase Option
At the end of the lease you have the option of buying leased
property for 10% of the original lease amount. This is
considered a Finance lease. Tends to yield a lower payment
than the $1.00 Option and a higher payment than the Fair
Market Value.
10% PUT
At the end of the lease, you guarantee to purchase leased
property for 10% of the original lease amount. This is
considered a Finance lease. If the 10% PUT is a higher value
than the expected Fair Market Value, then this option could
give you the lowest payment.
Payment Programs
Advance Payments
One or two advance payment(s), no advance payment, or a
predetermined percentage of cost as advance payment.
Monthly Payments
Can be structured to meet your specific cash flow needs. Such
as deferred payment programs wherein the first 30 to 90 days
payments maybe deferred. Irregular payments maybe structured
on a graduated payment program over the term of the lease. Can
be structured with or without a balloon payment at the end of
the lease. |
