Glossary

BARGAIN PURCHASE OPTION A lease provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception, that is substantially lower than the expected fair market value at the date the option can be exercised. ie $1.00!

Balloon A large payment - usually at the end of the term. Used in Conditional sales Contracts as an attempt to offer similar payment structure to a lease with an option to purchase.

BIG-TICKET A market segment, represented by lease financing over $1 million.

BROKER A company or person who arranges, for a fee, transactions between lessees and lessors of an asset. The fee is usually paid by the lessor.

CAPITAL COST ALLOWANCE An amount (expressed as a %) allowed to be expensed for tax purposes against the cost of capital assets acquired by a business. Different types of assets attract different %'s. Using this CCA or passing it on to a leasing Co in exchange for the ability to expense lease payments is one of the main determinants in deciding to lease or not to lease.

CAPITAL LEASE Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria: (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or (d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor. See our CICA page

CERTIFICATE OF ACCEPTANCE (DELIVERY AND ACCEPTANCE) A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

CLOSED END LEASE wherein the lessee is not expected or required to exercise an option to purchase the leased equipment. Most commonly seen in automobile leases from dealers and manufacturers. At the end of the lease the vehicle may be returned subject to mileage and condition of vehicle restrictions (which if not met can exact penalties).

CROSS BORDER LEASES Very large leases structured to take advantage of two tax jurisdictions

DIRECT FINANCING LEASE (Direct Lease) A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.

ECONOMIC LIFE (Useful Life) The period of time during which an asset will have economic value and be usable.

EFFECTIVE LEASE RATE The effective rate (to the lessee) of cash flows resulting from a lease transaction. To compare this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities.

EQUIPMENT SCHEDULE A document that describes in detail the equipment being leased. It may also state the lease term, commencement date, repayment schedule and location of the equipment. The lease agreement itself then is incorporated in a Master Lease to which the schedule(s) is deemed attached

FAIR MARKET PURCHASE OPTION An option to purchase leased property at the end of the lease term at its then fair market value. The lessor does not have the ability to retain title to the equipment if the lessee chooses to exercise the purchase option.

FIRST LOSS GUARANTEE In a lease a form of guarantee in which a lessor has recourse to a third party (typically the vendor) for a stated percentage of the capital cost or a percentage of any losses on disposal of the leased equipment in the event the lessee is in default and the equipment repossessed. Their loss is the "first loss"


So if the vendor guaranteed 30% of the loss or the first $30,000 of the loss the vendor would be obligated to suffer up to that amount and the balance of the loss would sit with the lessor (to recover as best they may from the lessee) Usually vendor lay conditions on how the equipment will be sold to ensure recovery maximized. (brought to our att by E.T)

FULL PAYOUT LEASE A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.

FUNDER The ultimate lessor! Many vendor lease programmes or leases negotiated with brokers are then assigned to a new lessor who funds the lease long term.

FUTURE VALUE The value of a present amount at a certain date in the future based on a determined rate of return.

HELL-OR-HIGH-WATER CLAUSE A clause in a lease that reiterates the unconditional obligation of the lessee to pay rent for the entire term of the lease, regardless of any event affecting the equipment or any change in the circumstances of the lessee.

HIRE PURCHASE Term originating in the UK for a lease with a nominal purchase option at the end

INDEMNITY CLAUSE A clause in which the lessee indemnifies the lessor from loss of tax benefits or from tax liabilities or other defined risks the lessor would not otherwise incur.

LEASE A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate

LEASE RATE (Rental Payment) The periodic rental payment (expressed as a factor) of the cost to a lessor for the use of assets. Others may define lease rate as the implicit interest rate in minimum lease payments.

LESSEE The user of the equipment being leased.

LESSOR The party to a lease agreement who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals.

LEVERAGED LEASE In this type of lease, the lessor provides an equity portion (usually 20 to 40 percent) of the equipment cost and lenders provide the balance on a non recourse debt basis. The lessor receives the tax benefits of ownership for the full amount. Only done in Canada for large amounts and under a complex structure to get around tax law which generally discourages this type of lease and the shelter it affords the investors. More common in the US.

MASTER LEASE The document containing the terms and conditions of leasing. Used for an ongoing lease line of credit where specific leased equipment rentals etc are described in Schedules attached to the master.

MIDDLE MARKET A market segment generally represented by financing under $1 million and over $25,000

NET LEASE A lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.

NON - CANCELABLE LEASE Any lease which cannot be cancelled during its term. In order to terminate the lease the Lessee will be expected to pay the remaining rentals due to the end of the term. Most leasing Cos will discount this amount to at least in part reflect a pre-payment. The discount rate is always lower than the effective rate (ie less than a full rebate of "unearned interest").

NON RECOURSE LOAN In a leveraged lease, the lenders cannot look to the lessor for repayment. The lender's only recourse is to the lessee and, therefore, the lessee's credit rating is of prime importance. Also used to refer to leases arranged through vendors (dealers) to differentiate from other leases where the lessor has recourse to the vendor for all or part of the unpaid balance of the lease if the Lessee defaults.

OPEN-END LEASE A lease in which the lessee guarantees that the lessor will realize a minimum value from the sale of the asset at the end of the lease. The term is restricted to car leasing

OPERATING LEASE Any lease that is not a capital lease. These are generally used for short term leases of equipment. The lessee can acquire the use of equipment for just a fraction of the useful life of the asset. Additional services such as maintenance and insurance may be provided by the lessor.

PRESENT VALUE The current equivalent of payments or a stream of payments to be received at various times in the future The present value will vary with the discount interest factor applied to future payments.

PURCHASE OPTION A provision by which a lessee has the right to purchase the equipment (usually at the end of or close to the end of the lease). The purchase option may be stated at a specified amount or at fair market value.

PUT OPTION The requirement to purchase equipment at a particular time and at a predetermined price. In a lease transaction, this is a lessor's right to force the lessee (or some third party) to purchase the equipment at the end of the lease term.

RESIDUAL VALUE The value of the leased asset at the conclusion of a lease.

SALE-LEASEBACK An arrangement whereby equipment is purchased by a lessor from the company owning and using it. The lessor then becomes the owner and leases it back to the original owner, who continues to use the equipment.

SMALL-TICKET LEASING Leases where the capital cost of the equipment is under $25,000.

STRETCH LEASE A lease with an option to purchase prior to the end of the term where the option is roughly equal to the value of the remaining rentals. Very common structure. Said to comply with IT233

TRUE LEASE A type of transaction that qualifies as a lease under Revenue Canada IT233 Guidelines. It allows the lessor to claim ownership and the lessee to claim rental payments as tax deductions.

VENDOR LEASING A working relationship between a financing source and a vendor to provide financing to stimulate the vendor's sales. The financing source offers leases or conditional sales contracts to the vendor's customers. The vendor leasing firm substitutes as the captive finance company of a manufacturer or distributor through the extension of leasing to customers, provisions of credit checking, and performance of collections and operational administration. Also known as lease asset servicing or vendor programs.


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