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GLOSSARY OF LEASING TERMS

Alternative Minimum Tax (AMT)
An alternative, separate tax calculation based on the taxpayer’s regular taxable income, increased by the taxpayer’s preferences for the year. The resulting amount is called the alternative minimum taxable income (AMTI). After certain exemptions and offsets, the taxpayer determines its AMT and is required to pay the larger of the regular tax or alternative minimum tax. Among the preferences that can increase the taxpayer’s AMTI is the accelerated portion of depreciation, thereby making it more likely that a taxpayer that buys equipment may be subject to the AMT rather than to regular tax.

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. (Also see finance lease.)

Certificate of Acceptance (Delivery and Acceptance)
A document whereby the lessee acknowledges that the equipment to be leased has been delivered, accepted, and has been manufactured or constructed according to specifications.

Cost of Capital
(Hurdle rate, opportunity cost of capital). Expected return that is forgone by investing in a project rather in comparable financial securities.

Discount Rate
An interest rate used to calculate the Present Value of future cash flows.

Economic Life (Useful Life)
The period of time during which an asset will have economic value and provide utility.

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.

End-of-Term Options
Common end-of-term options for leased equipment include renewing the lease, purchasing the equipment, returning the equipment to the lessor, or a combination of renew/return.

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.

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.

GAAP
Generally Accepted Accounting Principles.

Lease Rate (Rental Payment)
The periodic rental payment 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.

Master Lease
A contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract.

Modified Accelerated Cost Recovery System (MACRS)
The Tax Reform Act of 1986 established the MACRS tax appreciation system prescribing depreciation methods for each class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10, 15, or 20 year classes depending on ADR lives.

Net Present Value
A project's net contribution to wealth- present value of cash flows minus initial investment.

Off Balance Sheet Financing
Any form of financing, such as an operating lease, which, for financial reporting purposes, is not required to be reported on a firm's balance sheet. Another name for an "operating lease" because the liability for long term (over 12 months) rent does not appear on the balance sheet.

Operating Lease
Any lease that is not a capital lease. These are generally used for short termshort-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 at the end of the lease. The purchase option may be stated at a specified amount or at fair market value.

Residual Value
The value, either actual or expected, of leased equipment at the end, or termination, of the lease.

Return on Investment (ROI)
Generally, book income as a proportion of the book value of equity.

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

Yield
Rate of return for the lessor in a lease investment.

 

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