Leasing Definitions

Advance lease payments - payment(s) made by the lessee at the signing of the lease contract which is applied to the first and/or last rental payments.

Authorized signature - a signature by a person authorized by the company to obligate the company on a contract (i.e. lease). In a proprietorship or partnership, this person is the owner or general partner. In a corporation, it is a corporate officer.

Balloon payment - the final irregular large payment of a lease. Balloons are sometimes used with finance leases.

Certificate of acceptance (c of a) - the lessee's acknowledgement that the equipment to be leased is delivered installed and accepted as satisfactory.

Deferred payment lease - the initial lease payments are deferred for a prescribed time period in order to accommodate cash flow / capital budgeting requirements. Also known as skip payment, rent holiday, and grace period.

Down payment - payment required in advance. Commercial banks typically require up to 30% of the purchase price. Asset backed lessors base the down payment, if required at all, on the asset value and lease tenor.

Economic life - the period of time during which an asset is usable and possesses economic value. Also referred to as useful life.

End of term options - typically used with an operating of fair market value lease. Standard options most often used are (a) equipment return, (b) purchase the asset and (c) renew the lease.

Fair market value (fmv) - the price, at any given time that would be paid by a willing buyer to a willing seller in an arm’s length transaction.

Fair market value lease (fmv lease) - any lease where the lessor has an equity interest (residual) in the lease. The fmv lease provides lower payments and greater flexibility to the lessee. End of term lessee options may include: a) return the equipment with no further obligation. B) purchase the equipment for fair market value. C) re-lease the equipment for fair market value. A fmv lease is generally an operating lease although fmv-finance leases exist.

Finance lease - a leases which is really an installment purchase or hire purchase with the advantages of a lease transaction. Although the title to the asset passes to the lessee at the end of the lease, the lessee always retains the risks and rewards of ownership. As such, the lessee shows the asset and liability on their balance sheet and takes depreciation. Also known as a capital lease or ijara wa iqtina.

Guaranty - an Agreement to obligate oneself for the debt of another. A Guaranty by an individual is called a personal guaranty and by a corporation, a corporate guaranty. The guarantor is obliged to pay the obligation in the event of default by the lessee.

In service or placed in service - putting the equipment into use for its intended function or into a state of readiness for its intended use.

Interim rent - a charge for the use of equipment from its in-service date until the date on which the base term of the lease commences. This rate may be the daily equivalent of the base rental rate or some other charge. Because the lessee has the use of the equipment, this charge is properly characterized as rent, instead of interest or margin.

Lease - an agreement whereby the lessor conveys to the lessee in return for a payment or series of payment the right to use an asset for an agreed upon period of time.

Lease Rate Factor (LRF) - the periodic lease or rental payment expressed as a percentage (or decimal equivalent) of equipment cost. Used to calculate payments given the cost of equipment.

Lease schedule - a schedule to a “master lease” agreement describing the leased equipment, rentals and other terms applicable to that equipment.

Lessee - an individual or company that rents or leases equipment from a lessor.

Lessor - an individual or company granting a lease.

Line of credit - an agreement by a lender to provide funds to a borrower up to a specified maximum amount. Also known as a “facility”.

Master lease - a continuing lease arrangement whereby additional equipment can be added to the lease contract at subsequent date simply by describing that equipment and any updated terms in a new schedule executed by the parties.

Off balance sheet - the lessee does not show the leased equipment as an asset on his balance sheet because the lessee does not own the equipment, nor does the lease structure contemplate ownership. The lessee is also not required to report the corresponding long term liability. An “operating” lease which is essentially a long term rent is considered and “off “balance sheet.

Operating lease - a lease in which a lessee can acquire the use of equipment for a tenor that is less than the equipment’s useful life (a long term rental). The lessor does not recover the total asset value during the lease but will recover the residual value by either selling or releasing the asset in the second-hand market, thus lowering the lessee's payments. The lessee returns the asset at the end of the term, although most leases provide the lessee with a purchase and lease extension option. The lessee expenses the rental payments and the asset does not appear in the financial statements ("off balance sheet financing"). Also known as ijara.

Project or trade financing - a contract made with manufacturer, under which that manufacturer undertakes to make an item on certain conditions and specifications. The lessor pays the manufacturer, often using benchmarks and progress payments, and then resells or leases the completed asset(s) to the client. Also known as istisna.

P.U.T. - ( purchase upon termination) a guaranteed purchase stipulation, paid at the end of the lease.

Residual value - the value of the equipment at the conclusion of a lease.

Sale-leaseback - transaction where one party sells its equipment to another and immediately leases the same equipment back.

Security deposit - amount given (to FLB) by the lessee as security for the term of the lease. Provided the contract is not in default, the security deposit is returned to the lessee at the end of the lease terms. The security deposit may also be applied to the purchase option

Takedown - a funding of a lease, also know as a drawdown. The takedown date is usually coincides with the start date of the lease and occurs with the acceptance of the equipment.

Term or tenor - a specified period of time.

Vendor program - a working relationship between a lessor and a vendor whereby the lessor provides financing to the vendor’s customers. The vendor program substitutes as the captive finance company of a manufacturer or dealer-distributor in order to stimulate sales. Also known as vendor leasing.