Glossary of Terms
Acknowledgment A formal statement by a party before a notary public to the effect that they have executed a specific instrument or document.
Additional Insured A party other than a party in whose name insurance is issued who is also protected against losses covered by such a policy.
Advance lease payments One or more lease payments required to be paid to the lessor at the beginning of the lease term. Lease structures commonly require a nominal payment to be made at lease signing.
Agent A person who has legal authority to act for and represent another party in dealing with third parties.
Agreement The bargain of the parties in fact as found in their language or by implication from other circumstances.
All-risk insurance This is an insurance policy that covers an insured against loss from any peril other than those specifically excluded by the terms of the policy.
Appraisal An evaluation of the value of a specific item of property, usually as conducted by a person with expertise with respect to such property.
Balloon Payment A payment on a loan that is unusually large in comparison to the other payments on the loan. A balloon payment is usually the final payment on a loan.
Bargain Purchase Option A renewal option that will, as a certainty, be exercised because the consideration to be given for the purchase is so nominal as to be insignificant.
Bill of Sale A written document that evidences the transfer of ownership of property.
Capital Lease From a financial reporting perspective, a lease that has the characteristics of a purchase agreement, and also meets 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.
Cash Flow Income inflows less expense outflows, including debt service, over a specified period.
Certificate of Delivery and Acceptance A document that is signed by the lessee to acknowledge that the equipment to be leased has been delivered and is acceptable. Many lease agreements state that the actual lease term commences once the D&A has been signed. After the D&A is signed, the vendor is paid.
Certificate of Insurance A statement from an insurance company or its agent that a certain policy has been written. The certificate usually summarizes the policy’s coverage.
Closed-end Lease A lease that does not contain a purchase or renewal option, thereby requiring the lessee to return the equipment to the lessor at the end of the initial lease term.
Co-lessee An additional lessee to the lease. The lease will usually provide that the co-lessee is jointly and severally liable on the lease with the lessee. Most leases to non-public companies with individuals who own 20% or more are personally guaranteed.
Collateral Security, usually property (real, personal, or intangible) pledged to secure performance of an agreement.
Commercial Lease A lease in which the lessee has entered into the lease transaction for business or commercial purposes; business lease.
Commitment Fee A fee that is required by the lessor at the time the proposal or commitment is accepted by the lessee in order to lock in a specific lease rate and/or other lease terms. A commitment letter is a document prepared by the lessor that details its commitment, including rate and term to provide lease financing to the lessee. This document precedes final documentation and may or may not be subject to other conditions, such as lessor credit approval, guarantors, collateral, etc. This fee is typically at least $2,000 or 3% of the asset cost.
Conditional Sales Contract An agreement for the purchase of an asset in which the lessee is treated as the owner of the asset for federal income tax purposes. This entitles the lessee to the tax benefits of ownership, such as depreciation, but the lessee does not become the free and clear owner of the asset until all terms and conditions of the agreement have been satisfied.
Consumer Lease A lease in which the lessee has entered into the lease transaction for personal, family or household purposes. In some states certain agricultural leases may be considered consumer leases. MKL Funding does not provide consumer leasing.
Discount Rate A certain interest rate that is used to bring a series of future cash flows to their present value in order to state them in current, or today’s dollars. The Federal Funds rate is very common.
End-of-Term Options Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common options include purchasing the equipment, renewing the lease or returning the equipment to the lessor. Options are sometimes given as an amendment to the lease documents and are not made part of the actual lease document.
FASB 13 Statement of Financial Accounting Standards No. 13 issued by the Financial Accounting Standards Boards. This statement sets forth the generally accepted accounting procedures for lessor and lessee accounting and financial statement reporting.
Fair Market Value The value of a piece of equipment if the equipment were to be sold in a transaction determined at arm’s length, between a willing buyer and a willing seller, for equivalent property and under similar terms and conditions. Simply, the actual market value of the leased asset at the time the lease term is ended.
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.
Full-Service Lease A lease that includes many additional services such as maintenance, insurance and property taxes that are paid by the lessor, the cost of which is built into the lease payments.
Gross Lease A lease in which the lessor is liable for insurance, property taxes, maintenance expenses, and the like; aka, operating lease; service lease; maintenance lease. (Compare: net lease).
Guarantor - One who is obligated on a guaranty agreement. A guarantor may be another company and/or an individual.
Guaranty - An agreement to answer for the debt or obligation of another if that other party fails to pay or perform.
Insurance Interest An interest capable of being protected by a policy of insurance.
Investment Tax Credit (ITC) A credit against taxes otherwise due from a taxpayer under the Internal Revenue Code. The credit is generally computed as a percentage of the costs of certain types of assets. It is currently not a part of the IRS Code.
Landlord Waiver A document in which a landlord acknowledges that certain property on its tenant’s premises is owned by a third party (the lessor) and is leased to the tenant and in which a landlord agrees to recognize and not interfere with the lessor’s rights respecting the lessor’s property.
Lease A transaction in which use and possession but not title to tangible personal property is transferred for a consideration.
Lease Agreement The contractual agreement between the lessor and the lessee that sets forth all the terms and conditions of the lease.
Lease Line A pre-approved amount of leasing allowed a lessee by a lessor. MKL Funding commonly approves lessees for lines of credit.
Lease Payment The periodic payment made during the lease term. Such payments are usually of an even amount but it is not uncommon for a lease to have “gaps” in the payment amount, or to be otherwise contoured to fit, for example, the seasonal fluctuations of a lessee’s income. (Generally, leasing may provide for more creativity in this regard than a loan.)
Lease Term Length of a lease, usually stated in monthly increments but occasionally stated in quarterly or yearly increments.
Loss Payee - A party entitled to receive proceeds from an insurance settlement arising in connection with a covered casualty or loss.
Master Lease A lease document that allows a lessee to lease additional assets under the same basic lease terms and conditions originally agreed to, without having to renegotiate and execute a new lease contract with the lessor. Each new group of assets is listed on a separate schedule, and the specific pricing, terms, and conditions for that schedule are dependent upon the policies of the lessor, the terms and conditions of the Master Lease, and the cost of equipment.
Minimum Lease Payments From the lessee perspective, all lease payments that are required to be made, may be required to be made or, in all probability, will be made to the lessor per the lease agreement. Minimum lease payments for the lessee include, but are not limited to, the lease payments (excluding executory costs) during the non-cancelable lease term, bargain purchase options, and any put options, the amount of any lessee residual guarantees and nonrenewal penalities that are insufficiently severe to cause renewal. Minimum lease payments for the lessor include all payments to be received from the lessee, as described above, as well as the amount of any residual guarantees by unrelated third-party guarantors.
Net Lease A lease in which all costs in connection with the use of equipment, such as maintenance, insurance and property taxes, are paid for separately by the lessee and are not included in the lease rental paid to the lessor.
Operating Lease From a financial reporting perspective, a lease that has the characteristics of a use (rental) agreement and also meets certain criteria established by the FASB. Such a lease is not required to be shown on the balance sheet of the lessee. The term is also used to refer to leases in which the lessor has taken a significant residual position in the lease pricing and, therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return. The criteria for meeting FASB classification of an operating lease are:
Personal Property Tax A tax on the ownership of personal property. This tax is usually charged by a state or borough/county/parish annually for the assets leased for the prior year.
Purchase Option An option in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease term of the lease for either a fixed amount or at the future fair market value of the leased equipment.
Purchase Order An offer for the purchase of an item of property. The purchase order will normally specify the terms and conditions under which the buyer is willing to make the purchase; when accepted by the seller it becomes the purchase contract.
Renewal Option An option in the lease agreement that allows the lessee to extend the lease term for an additional period of time beyond the expiration of the initial lease term, in exchange for lease renewal options.
Residual - The value of the lease property at the end of the lease term as estimated at the time the lease is executed; term value. Although the terms “residual value” or “term value” are sometimes used in reference to the actual value of the property at the conclusion of the term, the term “realized value” is the more commonly used and more appropriate term for the actual value of the property at the conclusion of the lease term.
Residual Value The value, either actual or expected, of leased equipment at the end, or termination, of the lease.
Section 38 Property Any asset on which depreciation may be taken, defined by IRS.
Security Deposit A specific amount paid at the inception of the lease by the lessee to insure full compliance with the lease and to provide the lessor with some protection against faults, delays, or other failures of performance by the lessee. Occasionally, advance periodic lease payments may serve the purpose of a security deposit, but more frequently, the security deposit is a separately identified obligation.
Service Lease A lease in which the lessor provided complete service, maintenance, and care for the leased equipment; maintenance lease; operating lease; gross lease.
Trac Lease A motor vehicle lease with a terminal rental adjustment clause (i.e., an open-end lease) which meets the requirements of section 210 of TEFRA (as amended by TRA).
UCC Uniform Commercial Code, a code of commercial law enacted in all states.
Vendor A purveyor of equipment from whom a lessor purchases equipment at the specific request of a lessee for a lease to that lessee; a supplier.