Ted's Irreverent Terminology

Every financial institution on the web gives you a "Glossary of Terms".  For the most part, these are stodgy, legal definitions for terms commonly used in the banking industry.  The problem is, nobody tells you whether the term is a good thing or a bad thing for the borrower.  For example, everyone knows that the term "audit" can be a very, very bad term.  But what about terms like "ABC Lease" or "Mutually-Agreed Price"?  Unless you've been unfortunate enough to be swindled by the Bad Guys of the leasing industry, you'll never know that these terms are bad news for borrowers.  You need to understand not only the definition, but also the implication of such terms. To be blunt, too many normally-smart business owners don't read the legal documents they sign.  We aim to change that.  And understanding leasing terminology is the first step, and paramount to protecting yourself. 

Our financing structure wizard, Ted Browne, has put together this candid summary of terms for your use.  We believe he is uniquely qualified to render an opinion, since Ted was an anti-fraud officer with the Federal Reserve Bank of San Francisco before he joined us.

We call this section "Ted's Irreverent Terminology" (or "Ted's Terms", for short).  He just calls it "the truth."  He has tried to define each term in "plain language" to provide a clear (and sometimes irreverent) understanding of the defined term.  If you don't see the term on our list, e-mail Ted here. He'll get back to you in short order with his take on the terms.

Now, on to the terminolgy....

• ABC Lease: An operating lease meant to lull the suckered lessee into a false sense of security. The agreement is usually presented by unscrupulous lessors as a variation of a Fair Market Value lease. Call us for details.
• Accelerated Cost Recovery System (ACRS): An outdated method of tax depreciation. ACRS replaced the old "ADR class life" system. The Tax Reform Act of 1986 essentially replaced ACRS with the "Modified Accelerated Cost Recovery System".
• ACRS Life: Under ACRS, equipment fell into classifications of statutory life - 3, 5, 10, or 15 years. This classification determined the period over which the cost of the asset may be recovered via depreciation.
• Alternative Minimum Tax ("AMT"): A tax calculation meant to frustrate good accountants. Introduced with the Tax Reform Act of 1986, AMT makes it more difficult for both corporate and non-corporate taxpayers to minimize tax liability through the use of certain tax benefits (known as "tax preference items").
• Advance Rent: A general term to describe any rent paid prior to the base lease term and base lease rent.
• Application-Only Lease: Usually a small ticket lease of less than $150,000 in which the applicant is not required to provide proof of corporate assets or income in order to lease equipment.
• Assignment: A transfer of legal title. A lessee is usually prohibited from assigning its interest in a lease without the lessor's consent. Also used in leveraged leasing to describe transfers of the first security interest in a lease and lease rentals to a security trustee for leveraged debt holders.
• Bargain Purchase Option: In a nutshell, it’s when you get a deal at the end of the lease. Technically speaking, it’s common in determining FASB 13 qualification. This provision allows the lessee to purchase the leased asset during or at the conclusion of a lease for a price which is sufficiently lower than the expected fair market value.
• Base Renewal Option: A provision which allows the lessee, at its option, to renew the lease for a sufficiently lower than the expected fair rental for the property at the time the option appears, at the inception of the lease, to be reasonably assured.
• Base Rent: Rental paid during the base term of the lease.
• Base Term: The basic term of the lease. Relied upon by the lessee as the minimum time period during which the lessee will have the use and custody of the equipment.
• Base Term Commencement Date: The date on which the base term of the lease commences.
• Blanket Lien: Generally used by banks for securing bank financing. A blanket lien ties up all assets of the customer until the debt is repaid, essentially guaranteeing that future borrowing is stifled.
• Cash: A silly way to buy assets that only decline in value.
• Cash Flow: What you get when you lease instead of paying cash for an item.
• Capital Lease: Under FASB 13, a lease is classified by a lessee as a "Capital Lease" if it meets any of the following criteria:

• Certificate of Delivery & Acceptance: A document whereby the lessee acknowledges that the equipment to be leased has been delivered and in acceptable condition.
• Conditional Sale Lease: A lease which in substance is a conditional sale (sometimes called a hire-purchase agreement, money over money lease or a lease intended as security).
• Default: A crack in the crust of the earth. Also, an event defined in a lease agreement as a default, such as a failure to pay rent or perform some obligation required under the terms of the lease.
• Depreciation: A reasonable allowance for exhaustion, wear and tear, and obsolescence of equipment used in a trade or business. As a periodic item of expense, it allows the owner of the equipment to recover the cost of the equipment over its useful life. Depreciation deductions taken on the owner's tax return are sometimes referred to as "tax depreciation". Depreciation expenses listed in the owner's financial statements are sometimes referred to as "book depreciation". Typically, there is a difference between the two when the equipment involves technology.
• Depression: The state of mind most business owners assume when they purchase technology with cash before performing a Lease vs. Buy analysis.
• Dollar Purchase Option: Allows lessee to purchase equipment for $1 at the end of the lease term. Also known as "Buck-out."
• Economic Life: The estimated period during which the property is reasonably expected to be economically usable by one or more users for the purpose for which it was intended.
• Estimated Residual Value: The estimated fair value of the property at the end of the lease term.
• Factory Financing: Finance and marketing tool sometimes used by manufacturers to give the appearance of a "deal." Generally, the manufacturer will "hide" normal financing costs in the price necessary to obtain the special "factory" financing.
• Fair Market Purchase Option: An option to purchase leased property at the end of a lease at its then- fair market value. Depending on the lease agreement, this may be determined by the lessor, lessee, mutually agreed by both, or by an independent party.
• Fair Market Renewal Option: An option given to the lessee to extend the lease term by paying the fair market rental for the equipment during the renewal period. Fair market rental is usually determined in advance of the expiration of the primary lease term.
• FASB 13: Statement of Financial Accounting Standards No. 13, Account for Leases; Financial Accounting Standards Board, Stamford, Connecticut, November 1976. Sets formal financial accounting standards on accounting for lease arrangements.
• Full Service Lease: This type of lease obligates the lessor to provide maintenance, repair and insure the leased agreement. The lessor also pays the property taxes. Full service leases are nearly always true leases in which the lessor owns the equipment at the end of the lease.
• Guideline Lease: A tax-oriented lease which compiles with all of the IRS guidelines for a "true" lease as set forth in Rev. Proc. 75-21, 75-28, 76-30 and 79-48.
• Hell-or-High Water Clause: Self-explanatory. But for those of you in Rio Linda, it’s a clause which reiterates the unconditional obligation 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.
• Independent Lessor: Any leasing company investing or securing leases.
• Interim Rent: An amount paid by the lessee to account for the difference between the delivery date of the equipment and the actual start date (usually the 1^st of the month following delivery).
• Lease Intended as Security: A lease in which the lessee is considered owner for both legal and federal income tax purposes. A conditional sale or installment purchase for income tax purposes.
• Lease Line: A lease line of credit similar to a bank line of credit which allows a lessee to add equipment to a lease, as needed, under the same basic terms and conditions, without negotiating a new lease.
• Lease Term: The fixed, non-cancelable term of a lease. For accounting purposes, this includes all periods covered by fixed-rate renewal options which for economic reasons appear likely to be exercised at the inception of the lease. For tax purposes, this includes all periods covered by fixed-rate renewal options.
• Lease Versus Buy Model: Financial model comparing different methods of acquiring equipment. Smart business owners ALWAYS perform this analysis.
• Lien: A security interest on property to evidence a debt.
• Master Lease: A continuing lease arrangement whereby additional equipment can be made subject to lease contract from time to time merely by describing that equipment in a new schedule executed by the parties. This contrasts a lease contract that evidences a one-time transaction involving a specific unit or units of equipment.
• Mutually-Agreed Price: Specific lease language written into a lease contract to give unscrupulous lessors an unfair advantage in negotiating with suckered lessees. Call us for details.
• Net Lease: No, it’s not an Internet Lease. In a net lease, the rentals are payable "net" to the lessor. All costs in connection with the use of the equipment are to be paid by the lessee and are not a part of the rental. For example, property taxes, insurance and maintenance are paid directly by the lessee. Most leases are net leases.
• Participating Agreement: An agreement between the owner trustee, the lenders, the equity participants, the manufacturer, and the lessee which spells out the obligations of the parties under a leveraged lease. Also called "financing agreement".
• Pay-Out-Lease: A lease in which the lessor expects to recover its investment, plus interest, over the life of the lease from any or all of the following: rentals, cash flow from tax benefits and a modest expectation of a residual value.
• Personal Guarantee: Pledge of an individual to guarantee repayment of a lease transaction regardless of the circumstance of the lessee. Does not necessarily encumber personal assets.
• Pro Rata Rent: Payment made to lessor when the term of a lease between delivery of equipment and start of the base term is prolonged due to multiple equipment delivery dates. The rent is "pro rated" for the amount of equipment delivered prior to lease inception.
• Purchase Option: An option to purchase leased property at the end of the lease term. In order to protect the tax characteristics of a true lease, an option to purchase leased equipment from a lessor by a lessee which is granted at the beginning of a lease cannot be at a price less than its fair market value at the time the right is exercisable.
• 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. IRS guidelines prohibit put options in tax-oriented leases.
• Sale and Leaseback: Used by business owners who realize that paying for equipment with cash was a BIG mistake. A transaction which involves the sale of equipment by the owner and a lease of the same equipment back to the original owner who continues to use the equipment.
• Sales-Type Lease: A lease in which the lessor is also the vendor (manufacturer or distributor) of the equipment.
• Section 179: Special tax deduction for small business owners on small ticket leases. If structured correctly, a lease agreement may allow a business owner to accelerate tax deductions amounting to the entire cost of the equipment purchased up to approximately $20,000. The business owner is also able to deduct "interest" throughout the life of the lease.
• Small Ticket Lease: Any lease that can be consummated on an "application-only" basis.
• Spread: The difference between funding costs and the rate of return to the lessor on a lease.
• Step Down Lease: Variation of the "Step Lease." A lease where the lease payments decrease over the term of the lease.
• Step Rental Lease: A lease where the payment changes at mutually-agreed periods during the lease term. Often a step rent lease allows the lessee to pay less initially and more later in the term.
• Step Up Lease: Similar to, again, a "Step Rental Lease" and a "Step Down Lease" except the lease payment is increased during the term of the lease.
• Stipulated Loss Value: A schedule included in a lease which states the agreed value of equipment at various times during the terms of the lease, and establishes the liability of the lessee to the lessor in the event the leased equipment is lost or rendered unusable during the lease term due to a casualty loss.
• Sublease: A lease for a submarine. Just kidding. A transaction in which leased property is released by the original lessee to a third party, and the lease agreement between the two original parties remains in effect. Usually, this is not allowed.
• Tax-Oriented Lease: A true lease for federal tax purposes which allows the lessor to claim the tax benefits on the leased equipment.
• Ten Percent Put or Option: Balloon payment that either obligates or allows the lessee to purchase the equipment for 10% of the original cost.
• Termination Value: The contracted minimum amount that the lessor must receive as proceeds from the sale of the equipment if the lessee elects to terminate the lease before the expiration of its full term.
• UCC: Uniform Commercial Code. The UCC has been adopted by essentially all states to govern commercial transactions.
• UCC Financing Statement: A document filed with the Secretary of State (and sometimes with the county) to provide public notice of a security interest in personal property.
• Useful Life: Nah, this one’s too easy of a target. Officially, it’s the period of time during which an asset will have economic value and be useable. The useful life of an asset is sometimes called the economic life of the asset.
• Vendor Leasing: Used to describe vendor leases offered by a manufacturer, dealer or a third party leasing company under a working relationship between the third party leasing company and the manufacturer or dealer.