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Leasing Terminology

The following list of common leasing terms with descriptions based on standard equipment leasing in the U.S. market.

Advance Rentals

Any advance rentals or upfront payments paid by the lessee to the lessor for the rental of any asset will be applied to the total number of rentals due.

Delivery and Acceptance
A document whereby the lessee acknowledges that the equipment has been delivered, installed correctly, is acceptable, and has been manufactured or constructed according to specifications.

Conditional Sales Agreement
A lease where the lessee has the option to purchase the equipment for a specified amount (typically up to 10% of the amount financed), or the option to return the equipment to the lessor. This type of lease is traditionally used when equipment ownership is desired. This lease provides the same tax benefits as ownership, allowing the lessee to claim equipment depreciation and interest expense deductions.

Economic Life
The period of time during which an asset will have economic value and be useable for a business.

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

Fair Market Value
The assessed value of equipment based on actual market demand.

Fair Market Value Lease
A lease where the lessee has the option to purchase the equipment at fair market value, renew the lease (payments based on fair market value), or return the equipment to the lessor. An FMV lease provides tax advantages because the lessee can fully claim the lease payments as a business expense thus lowering the businesses taxable income. The lessor, as the owner of the equipment receives the benefit of claiming depreciation. This benefit is passed on to the lessee in the form of lower payments.

Lease
A legal contract where the owner (lessor) gives another party (lessee) the right to use a piece of equipment for a specified time in exchange for periodic payments.

Lease Term

The period of time that the lease is written to cover.

Lessee
The equipment user.

Lessor
The equipment ower.

Master Lease Agreement
A contract that allows a lessee to acquire multiple assets overtime utilizing the same terms and conditions. This eliminates the need for negotiating and executing subsequent contracts.

Manufacturer

The company that actually makes the equipment you are lease financing.

Purchase Option
A provision that allows the lessee to purchase the equipment at the end of the lease. The purchase price may be stated as a specific amount or at fair market value.

P.U.T.
An agreement that legally requires the lessee or a third party to purchase the equipment at the end of the lease for a pre-specified amount.

Residual Value
The value of an asset at the end of a lease.

Sale-Leaseback
An arrangement that allows a business to turn an equipment purchase into an equipment lease. The lessor buys the equipment and becomes the equipment owner. This provides a cash flow boost to the business, but allows the business to continue to use the equipment. In turn, the lessor receives lease payments on the equipment.

Security Deposit

Money that you pay to secure payment, which is held by lessor. It is not unusual that a portion of the advance rental is applied as a Security Deposit. For example: two payments, applied as the first monthly payment and as a Security Deposit that will be held as a security deposit during the term of the lease.

True Lease or (FMV Lease)
A lease where the lessee has the option to purchase the equipment at fair market value, renew the lease (payments based on fair market value), or return the equipment to the lessor. An FMV lease provides tax advantages because the lessee can fully claim the lease payments as a business expense thus lowering the businesses taxable income. The lessor, as the owner of the equipment receives the benefit of claiming depreciation. This benefit is passed on to the lessee in the form of lower payments.

TRAC Lease
A TRAC lease is designed for commercial vehicles and trailers that generate revenue while in use. At the end of the term, the vehicle may be purchased for a pre-specified amount (usually 20%) or sold to a third party. If is it sold to a third party for more than the pre-specified amount, the lessee keeps the profit. If it is sold for less than the pre-specified amount, the lessee must still pay the specified amount to the lessor. This “adjustment clause” allows the lessee to fully claim the lease payment as a business expense thus lowering the businesses taxable income.

Use Tax

A state and county tax based on the monthly rental payment and the tax rate applicable where the equipment is located. The tax is collected monthly up to the maximums and forwarded to the appropriate Department of Revenue, Sales and Use Tax Division.

Vendor

This is the company who is selling you the equipment. It’s usually your local distributor or dealer.

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