What is a lease?

A transaction in which use and possession but not title to the equipment is transferred.

Who are the parties to a lease?

The “lessor” is 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 rental payments. The “lessee” is the user of the equipment being leased.

What is a lease agreement?

The contractual agreement between the lessor and the lessee that sets forth all the terms and conditions of the equipment lease.

What is a lease payment?

The periodic payment made during the lease term. This payment will usually be paid every month, but may be paid quarterly.

What is a broker?

A company that arranges transactions between lessees and lessors of an asset.

What is a vendor?

The business that sells the equipment that is leased through the equipment lease agreement.

What is a closed-end lease?

A lease that does not contain a purchase or renewal option that the lessee can exercise at the end of the lease. This type of lease requires the lessee to return the equipment to the lessor.

What is a capital lease?

From a financial reporting perspective, a lease that essentially transfers ownership from the lessee to the lessor, and also makes certain criteria established by the Financial Accounting Standards Board Statement No. 13 (FASB 13). Such a lease is required to be shown as an asset and a related obligation on the balance sheet.

What is a finance lease?

A lease that is accounted for as a purchase of equipment instead of as a rental of equipment. This will usually be a lease that covers most of the useful life of the equipment or a lease that has a bargain purchase option at the end.

What is an operating lease?

Any lease that is not a capital lease. This is usually when the lease term is shorter than the Economic Life of the leased equipment.

What is a True Lease?

A type of transaction that qualifies as a lease under the Internal Revenue Code. It allows the Lessor to claim ownership and the lessee to claim rental payments as tax deductions.

What is a Tax Lease?

A true lease for Federal tax purposes that allows the lessor to claim the tax benefits on the leased equipment.

What is a purchase option?

An option in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease for either a fixed amount of money (which might be $1.00 or ten percent of the original equipment cost) or at fair market value of the leased equipment at the time the lease is completed.

What is bargain purchase option?

An option to purchase the equipment at the end of the lease for less than its market value. Most common bargain purchase options give the lessee the right to buy the leased equipment for $1.00.

What is fair market value?

The value of the piece of equipment if the equipment were to be sold in the open market. A purchase option may be written to allow the purchase of the equipment at the fair market value.

What is a put option?

The requirement to purchase equipment at a particular time and at a predetermined price. In a lease transaction, this is the price that the lessee agrees to pay to the lessor at the end of the lease term for the purchase of the equipment.

What is residual?

The value of the leased equipment at the end of the lease term. In a fair market value lease, this will usually be estimated at the time the lease begins.

What is pre-funding?

Many vendors require that they be paid at least 50% of the invoice amount before providing the equipment to the lessee. This is called prefunding.

What is Off Balance Sheet Financing?

A form of financing, such as an operating lease, which is not required to be reported on a lessee’s balance sheet.

What is a Lease Line?

A pre-approved amount of debt or money that a lessor will allow to a lessee.

What is a Sale Leaseback?

An arrangement whereby leased equipment is purchased by a lessor from the company that already owns it and has been using it. The lessor then becomes the owner and leases it to the original owner, who continues to use the equipment.

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