Glossary      Types of Leases      Benefits of Leasing

Glossary:

Acceptance Certificate
(often referred to as Delivery and Acceptance Certificate) 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.

Assignment
Lease agreements generally contain a provision permitting the Lessor, or other type of Lender, to transfer the Lease to another party by "Assignment". Assigning the lease does not affect the terms and conditions of the lease itself.

Capital Lease
The term "capital lease" is a FASB (accounting) classification. A lease is classified as a capital lease when the risks and benefits of ownership are transferred from the lessor to the lessee. With a capital lease, lessees must treat the lease transaction as if the asset was purchased. A capital lease does not qualify as a True Lease for tax purposes or an Operating Lease as defined by FASB 13 accounting standards.

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

Fair Market Value Lease
A lease where the lessee has the option at lease end to purchase the equipment at fair market value, renew the lease, 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. From an accounting perspective, a FMV lease generally qualifies as an operating lease.

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.

Lessee
The equipment user.

Lessor
The equipment owner.

Non Tax Lease
The term "Non Tax Lease" is an Internal Revenue Service classification. The IRS treats the lease as if it were a purchase or loan for tax purposes. The lessee receives the same tax benefits as ownership. That means a customer is entitled to claim depreciation and interest expense deductions in lieu of claiming the lease payment as an operating expense deduction.

Operating Lease (FASB 13)
The term "operating lease" is a FASB classification. The lease is accounted for as a pure rental. The equipment is neither shown as a liability nor an asset on the lessee's business balance sheet.

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.

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

Sale-Leaseback
A lessor buys equipment from a business and immediately releases the equipment back to the business. 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.

True Tax Lease
The term "true tax lease" is an Internal Revenue Service classification. The lessor is the owner of the equipment for federal income tax purposes. The lessor receives the right to the tax benefits of ownership, including depreciation and any tax credits. The lessee receives a tax benefit by being allowed to claim the lease payment as as operating expense thus lowering businesses taxable income.

Types of Leases:

$1 Buyout Lease
The $1 Buyout Lease is primarily designed for businesses who are fairly certain that they want to own the equipment after their lease term ends. The $1 Buyout Lease combines some of the benefits of leasing with those of ownership. This is the preferred option for businesses who believe that they will want to own the equipment at the end of the lease term.

At the end of the lease term, the business can purchase the equipment for $1.00.

General Tax Classification: Non Tax Lease
General Accounting Classification: Capital (Finance) Lease

10% purchase option
This lease is for businesses who want the flexibility to purchase, continue leasing, or return the equipment, but wish to lock in their costs at the time the lease is initiated.

At the end of the lease term, the business may do either of the following:

• Replace the equipment with new equipment
• Purchase the equipment for 10% of the original financed amount

General Tax Classification: Non Tax Lease
General Accounting Classification: Capital (Finance) Lease

Fair Market Value (FMV) Lease
A FMV lease is primarily designed for businesses that want the lowest monthly payment with the greatest flexibility at the end of the lease term. With a FMV lease, the lessor retains ownership of the asset for tax purposes, and the lessee typically claims all lease payments as an operating expense or tax deduction. A FMV lease is a good option for a company that wants to control its budget with the lowest available payment freeing up cash for its core business.

At the end of the lease term, you have the following options:

• Return the old equipment
• Continue to lease it for a monthly amount based on the Fair Market Value
• Purchase the equipment at Fair Market Value

General Tax Classification: True Tax Lease
General Accounting Classification: Operating Lease

Benefits of Leasing:

Management of cash flow
Mismanagement of cash flow is a major reason why businesses fail. With leasing, businesses know the amount and number of lease payments over the life of the leasing period, so that businesses can accurately forecast cash requirements for equipment and hedge against inflation.

Tax Advantages
Leasing can help minimize tax liability through two ways. Depending on the structure, lessees can either deduct the entire lease payment or take advantage of the same tax benefits as ownership.

Preserve credit lines and working capital
Leasing enables companies to utilize 100% financing while preserving valuable bank lines and precious working capital. That means companies are able to reinvest their free cash on their core business maximizing their return on their capital

Off Balance Sheet Financing
Companies often need to maintain certain debt-to-equity ratios or comply with debt covenants. With an operating lease, lease payments are recorded as operating expenses. Lessees are then able to keep the asset and matching liability off its balance sheet improving debt and productivity ratios.

Convenient, fast and flexible
Leasing can allow you to respond quickly to new opportunities with minimal documentation and red tape. Many leasing companies can approve your application within one or two days and you can have your equipment very quickly. In addition, lessees are able to customize a program to address specific needs and requirements - cash flow, budget, transaction structure, cyclical fluctuations, etc.

Protection against obsolescence
A lease allows equipment to be returned to the lessor at the end of the lease. Businesses can then upgrade equipment without having to manage disposal and other ownership burdens. With leasing, companies can ensure that they attain the most advanced technology, rather than having obsolete equipment.