Understanding some of the jargon used by leasing companies is often helpful. Listed below is a glossary of leasing terms. If you understand these terms, it should help in better understanding a leasing company and leasing transactions. We hope they are of some use. We have tried to define each term without use of other technical and jargonistic terms to provide a clear understanding of the defined term.

Broker
An intermediary between the lessee and lessor. The broker arranges a leasing transaction. The broker is usually paid some fee by the leasing company for its services.

Capital Lease
A specific classification of a lease for accounting purposes. The classification of the lease will determine how the lease is to be accounted for. A lease is accounted for by the lessee as a capital lease if it meets one of the following criteria: (a) at the end of the lease, the lessee owns the property being leased; (b) at the end of the lease, the lessee can purchase the property for a bargain purchase option; (c) the lease term exceeds 75% of the estimated economic life of the leased property; (d) the present value of all lease payments is equal to 90% or more of the cost of the leased property.

Capped Fair Market Value
A provision in the lease allowing the lessee to purchase the leased property for its fair market value, but not exceeding a certain amount. The advantage of the cap is that the lessee will know the maximum payment required to purchase the leased property.

Certificate of Acceptance
A written verification by the lessee that they have received the property to be leased. Most leases begin after the date stated on the certificate of acceptance.

Coterminous
Two or more leases that end at the same time.

Cross Corporate Guaranty
A guarantee by one corporation to pay the lease obligations of another corporation.

Default
If a lessee does not comply with the terms of the lease, a default occurs. Generally, after a default, the lessor can exercise all of its rights under the lease to repossess the property and seek money damages.

Direct Finance Lease
Same as a capital lease except this accounting classification only applies to a lessor. Why FASB choose two names for the same term, only they in their infinite wisdom know.

Dollar Buyout
An option at the end of the lease to buy the leased property for $1.

Economic Life of Leased Property
The estimated time the leased property can be used with normal repairs and maintenance.

Fair Market Value
The technical definition of fair market value is the price a willing buyer will pay a willing seller for leased property on an "as is, where is" basis with both under no compulsion to either buy or sell. In reality, this is a vague term, often creating a question between a lessor and lessee regarding what is the fair market value. Stated another way, what will someone pay for the leased property at the end of a lease.

Fair Market Value Purchase Option
Similar to a purchase option, this lease term gives the lessee the ability to purchase the leased property at its fair market value at the end of a lease.

FAS 13
Technically, this is the statement of Financial Accounting Standards No. 13 entitled "Accounting for Leases". This book sets forth standards for how parties to a leasing transaction should account for such transaction.

FASB
This is the Financial Accounting Standards Board. This is the group that, on high, dictates the general accounting policy and theory which is to be followed by both internal accountants as well as external auditors.

FAZ­BEE
Another name for FASB.

Financial Statements
Accounting statements that provide specific information about a company’s financial position. They include the Profit & Loss Statement, also known as the Income Statement, the Balance Sheet, and the Statement of Cash Flows. Financial statements can generally be audited by an outside CPA firm or be unaudited and, thus, prepared by the company.

Financing Statement
This is a document specified under the Uniform Commercial Code, a law applicable in all states. This puts the world on notice that a security interest has been filed against the person on the form listed as the debtor.

Hell or High Water Clause
This is a provision in a lease agreement which indicates the lessee is required to pay the lease payment for the entire term of the lease. Problems encountered by the lessee with the leased property are not valid reasons for not making lease payments.

Interim Rent
Rent paid for an interim period of time. Many leases begin at the start of a period such as the first of the month. If leased property is received and a certificate of acceptance is signed prior to that date, often there is an interim period between the acceptance and the start of the first lease rental. This period of time is called the interim term during which the interim rent is paid. The interim rent is generally calculated as a percent of the standard monthly rent prorated over the number of days in the month the lessee has use of the leased property.

Investment Grade Credit
Generally refers to a lessee of high credit standing. Technically, an investment grade credit is a company rated highly by one of many recognized credit agencies such as Standard & Poor's.

Lease
A contract giving the lessee the right to use the leased property for a period of time.

Lease Line
A line of credit similar to a bank line of credit. It allows the lessee to easily add additional leased property under the same terms and conditions without negotiating additional agreements.

Lease Rate Factor
This is a percentage which when multiplied by the cost provides a periodic rental. It is a helpful number when used by either a sales person or the lessee. In the event the cost of the leased property is either not exactly known or may change, having the lease rate factor allows a quick recalculation of a lease payment when that number becomes known.

Lease Term
The fixed term of the lease.

Lessee
The user of leased property under the lease.

Lessor
Depending on the type of lease, either the owner of the leased property or the owner of a security interest in the leased property.

Letter of Credit
A specific arrangement between a lessee and one of it's banks. The bank agrees in the event of a defined event, the lessor can look to the bank to make payment instead of the lessee. This is similar to a security deposit in that it is one way for a lessor to insure that it will be paid under a lease.

Master Lease
The primary document between the lessor and lessee containing all the general terms and conditions for leasing. Individual leases can then be relatively short and incorporate the master lease by reference. It is a very convenient administrative document so that once agreed, legal terms and conditions never need to be negotiated again.

Middle Market Credit
A lessee without an investment grade credit rating, but generally with sales greater than $50 million annually.

Municipal Lease
Same as a capital lease except that the lessee is a public entity. Although the product and features are identical, the legal documentation is different because of the unique status of public entities.

Net Lease
Any lease where all costs in connection with the use of the leased property are paid by the lessee and are not part of the periodic lease payments. For instance, maintenance, insurance and taxes are paid directly by the lessee. Capital leases are generally net leases.

Operating Lease
Another accounting classification for a lease. A lease that does not meet the criteria for a capital lease is an operating lease. With an operating lease, the lessor is generally taking a risk that at the end of the term the lessee will either purchase the leased property, renew the lease, or the leasing company can remarket the leased property for its residual value.

Personal Guarantee
The guarantee of someone to be individually responsible for the obligations under the lease. Generally for Subchapter S closely held companies and small businesses, a leasing company may ask for a personal guaranty as a way to insure that the lease payments will be made.

Progress Payment Loan
LPI makes all milestone payments required by the software vendor until all software, equipment, customization, training, installation and conversion has been provided by the software vendor. This product is generally used with larger transactions that require milestone payments over a short time between three months and 18 months.

Purchase Option
Option to purchase leased property at the end of the lease term.

Refundable Security Deposit
An amount paid by a lessee to provide extra protection to the lessor to insure that the lessee will pay its obligations under the lease.

Remarketing
The process of selling or re­leasing leased property which has been returned to the lessor either at the end of the term or as a result of a default in lease.

Remarketing Fee
A fee paid for selling or re­leasing leased property.

Rent Holiday
A period of time during which a lessee is not required to pay rent.

Residual Value
The value of leased property at the end of the lease term.

Sale­Leaseback
A transaction which involved the sale of property by the lessee to the lessor and a lease of the property back to the lessee.

Security Interest
An interest in property that is acquired for purpose of securing payment of a lease obligation. A security interest allows the holder of the security interest to obtain the property in the event of default and gives the holder additional rights in the event of bankruptcy.

Spread
The difference between funding costs and the rate of return to the lessor on a lease.

Step Down Lease
Another variant of the "Step Rental Lease". A lease where the lease payments decrease over the term of the lease.

Step Rental Lease
A lease where the rent may change during the term of the lease. The change is known at lease inception and is agreed by both the lessor and the lessee. 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
This is a term in a lease requiring the lessee to pay the value of the leased property in the event there has been some type of damage or destruction to the leased property.

Term
Generally leases run for 12, 24, 36, 48 or 60 months.

Vendor
An entity that provides leased property to customers.

Vendor Leasing
A working relationship between a leasing company and a vendor to provide leasing to the vendor’s customers. In some sense, the leasing company is working as an extension of the vendor providing credit checking, billing and collecting documentation, and customer service. The leasing company, generally, is accepting the credit risk.