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Leasing Terminology

 

This page will serve as a primer to those who are not familiar with leasing and as a refresher to those who are. Following the Terminology section there is a section covering "End of Lease" options and a section on "Payment Program" options.

 

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.

 
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