Add-On: A transaction that adds additional equipment to an existing lease. This term is typically used when the new equipment is financed using the same lease structure (i.e, Fair Market Value, $1.00 Purchase Option, etc.) as was used for the initial transaction except that the lease term for the add-on equipment is set so that it matures on the same date (coterminous) as the original transaction.

Advance Payments: Payments made by the lessee at the inception of a leasing transaction, and in advance of each subsequent period of use.

Amortization: The reduction of the purchase price, or value, of an asset by prorating its' acquisition costs over a period of years.

Bargain Purchase Option: An option given to the lessee to purchase the equipment on lease at a price that is less than the expected fair market value so that, at the inception of the lease, it is reasonable to assume that there will be a very high probability that the lessee will purchase the equipment on the option date or maturity of the lease.

Capital Lease: A direct substitute for purchase of the asset with borrowed money. It is a contract to make a series of payments in return for use of an asset for a specified period of time. It transfers substantially all the benefits and risks inherent in the ownership of the property to the lessee. A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset to be depreciated; thus the lease is recorded on the lessee's balance sheet as an asset and corresponding liability (lease payable), and periodic lessee rental payments consist of interest and principal.

In accordance with the criteria outlined in paragraph 7 of FASB 13, a capital lease is one that meets at least one of four criteria, which are:

Title passes automatically to the lessee at the end of the lease term;

Lease contains a bargain purchase option (i.e., an option to purchase the leased asset for less than its' fair market value)

Lease term is greater than 75% of estimated economic life of the equipment; and

Present value of lease payments is greater than 90% of the equipment's fair market value

Conditional Sales Contract: A contract in which the lessee customer pays for the asset being acquired in installment payments over a pre-determined period of time, rather than all at once. Title to the asset may pass to the lessee at the commencement of a lease contract, or it may pass to the lessee automatically upon the lessor's receipt of the final installment payment.

Depreciation: A means for the recovery of the cost of a purchased asset, over time, through periodic offsets to income. These offsets, or deductions, represent a reasonable allowance for an asset's loss of value over time due to obsolescence or use. Per Government Accounting Standards Board Statement 34, an asset is to be reported at its historical cost which is depreciated over its estimated useful life.

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 day dollars. Use of a discount rate removes the time value of money from future cash flows.

Dollar Buyout: An option at the end of a lease to buy the leased property for one dollar ($1.00).

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.

FMV - Fair Market Value, which is the then current value of the equipment if the buyer is willing to buy and the seller is willing to sell.

Dollar Buyout - Equipment is purchased for a fixed dollar amount at the end of the lease (it can actually be $1.00).

Residual Value - This is the value, expressed as a percentage of the original purchase price, that the lessor estimates the equipment will retain at a specified point in the future.

Estimated Useful Life: The period of time during which an asset is expected to have a functional use and economic value, as used in a trade or business. Estimated Useful Life is used for determining whether or not a lease qualifies as a capital lease or operating lease. Per Governmental Accounting Standards Board (GASB) Statement 34, a government entity's estimation of an asset's useful life should be based on experience with similar assets and the plans for the assets. As a general guideline, estimated useful lives for select assets commonly acquired under a lease-financing program are as follows:

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.

Fair Market Value Lease (FMV): A lease which includes an option for the lessee to either renew the lease at a fair market renewal value or purchase the equipment for its fair market value at the end of the lease term.

Finance Lease: A finance lease finances the purchase of the asset over a period of time that covers most of its useful life, and includes three end of lease options: renew the lease for an additional period, usually one fiscal period at a time; return the asset to the party providing the lease-financing services (the Lessor); or purchase the asset for a nominal amount, usually $1.00. A Finance leases is generally considered to be a capital lease.

Fixed Price Purchase Option: An option given to the lessee to purchase the leased equipment from the lessor on the option date for a guaranteed price. Both the date and the price must be determined at the inception of the lease. A typical fixed price purchase option may be equal to 10% of the equipment's original cost.

Full Payout Lease: A lease in which the total amount of all lease payments is sufficient to pay the lessor the entire cost of the equipment including financing, overhead, and a reasonable rate of return, with little or no dependence on a residual value.

Installation Date: In substance, the Installation Date is the date the lessee acknowledges in writing that Items of Equipment have been accepted and tested and are ready for use.

Interim Rent: The rent collected between the Final Installation Date and the Base Term Commencement Date.

Lease: A contract through which an owner of equipment (the lessor) conveys the rights of possession and use of the equipment to another party (the lessee) for a specified period of time and for specified periodic payments.

Lease Rate Factor (LRF): A factor used to derive lease payments. This is a percentage that, when multiplied by the cost of equipment, provides a periodic rental. 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 Purchase: A lease-purchase contract allows for the purchase price of an asset to be amortized over the term of the contract, and for equity to be gained in the asset with the payment of each periodic installment which contains two components: principal and interest. Lease purchase agreements are usually considered to be capital leases.

Lease Schedule: Listing of equipment to become subject to a lease, which describes the equipment in detail. The schedule may reflect the lease term, the commencement date and the location of the equipment and may be incorporated into the basic lease agreement by reference.

Lessee: The party to a lease agreement who is obligated to make periodic lease rental payments to the lessor in exchange for the rights of possession and use of the leased equipment during the lease term, provided all other terms and conditions under the lease are maintained on a satisfactory basis.

Lessor: The party to a lease agreement who has the legal or tax title to equipment (in the case of a true tax lease), which grants a lessee the right to use the equipment for the lease term in exchange for the receipt of periodic lease rental payments.

Master Lease: A Master Lease Agreement establishes the principal terms and conditions that will apply to all financed acquisitions, yet allows for new equipment to be added to the agreement via lease schedules which pertain to the specific assets being financed. Periodic payments under each lease schedule are structured in a manner that reflects the useful life or intended service period of the asset being financed. A Master Lease Agreement may be structured as a capital lease or an operating lease.

Municipal Lease: A lease designed to meet the special needs of state and local governments. The lease contains a non- appropriation clause which states that the only condition under which the entity may be released from its payment obligation is when the legislature or funding authority fails to appropriate funds. Since the lessee is a municipality or an organization supporting the government, it is exempt from paying federal income taxes. For this reason, the IRS does not charge the lessor income taxes on leases to these customers.

Operating Lease: Also referred to as a rental arrangement, or a true lease. A contract that allows for the use of an asset over a specified period of time, but does not convey rights similar to ownership of the asset to the party utilizing the asset (lessee).

As defined in FASB 13, an operating lease must meet all of the following characteristics:

1. Lease term is less than 75% of estimated economic life of the equipment;
2. Present value of lease payments is less than 90% of the equipment's fair market value;
3. Lease cannot contain a bargain purchase option (i.e., less than the fair market value); and
4. Ownership is retained by the lessor during and after the lease term.

Payment in Arrears: Periodic payments for leased assets which are due at the end of each period of use.

Present Value: The discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present Value represents a series of future cash flows expressed in today's dollars.

Progress Payment: Occasionally, an equipment supplier or a contractor on an energy generation project may require payment for completed stages of a large, ongoing project.  In these instances, portions of the amounts committed under a lease-financing vehicle may be disbursed to pay these obligations.  If the lease-financing vehicle was structured to pay against individual invoices, interest accrues only on the amounts so disbursed.  If proceeds from the lease-financing vehicle were fully disbursed into escrow at the commencement of a project, the accrual of interest will remain in accordance with the terms in effect at the time of the initial disbursement. 

Purchase Option: An option given to the lessee to purchase the equipment from the lessor, usually as of a specified date.

Remarketing: The process of selling or leasing the leased equipment to another party upon termination of the original lease term. The lessor can remarket the equipment or contract with another party, such as the manufacturer, to remarket the equipment in exchange for a remarketing fee.

Renewal Option: An option in the lease agreement that allows the lessee to extend the lease term for an additional period beyond the expiration of the initial lease term, in exchange for lease renewal payments.

Residual Value: The estimated value that an item of equipment will retain at various points during the term of a lease, net of the effect of depreciation and assuming that the equipment has been maintained in good working condition, normal wear and tear excepted.

Sale Leaseback: A transaction that involves the sale of equipment to a leasing company and a subsequent lease of the same equipment back to the original owner, who continues to use the equipment.

Skip-payment Lease: A lease that contains a payment stream requiring the lessee to make payments only during certain periods of the year.

Step-up or Step-down: A feature of a lease that contains a series of payments which either increase (step-up) or decrease (step-down) in amount at certain periods during the term of the lease.

Supplier: An entity that provides leased property to customers. (also referred to as "Supplier" or "Equipment Supplier")

UCC Filing: A notice of security interest filed under the Uniform Commercial Code to perfect a security interest in the leased property.

Useful Life: - see "Estimated Useful Life".

Upgrade: To trade in leased equipment for a newer, more advanced model of a similarly functional item of equipment during the lease term.

Vendor: An entity that provides leased property to customers. (More commonly referred to as "Supplier" or "Equipment Supplier)