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The following list of common leasing terms with descriptions based on standard equipment leasing in the U.S. market.
Broker
A company or person who arranges transactions between a lessee and a lessor. The broker receives a fee for this service.
Certificate of Acceptance
(Delivery and Acceptance) A document whereby the lessee acknowledges that the equipment has been delivered, installed correctly, is acceptable, and has been manufactured or constructed according to specifications.
Delivery and Acceptance
A document whereby the lessee acknowledges that the equipment has been delivered, installed correctly, is acceptable, and has been manufactured or constructed according to specifications.
Conditional Sales Agreement
A lease where the lessee has the option to purchase the equipment for a specified amount (typically up to 10% of the amount financed), or the option to return the equipment to the lessor. This type of lease is traditionally used when equipment ownership is desired. This lease provides the same tax benefits as ownership, allowing the lessee to claim equipment depreciation and interest expense deductions.
Economic Life
The period of time during which an asset will have economic value and be useable for a business.
Equipment Schedule
A document that describes in detail the equipment being leased. It may also state the lease term, commencement date, payment schedule and location of the equipment.
Fair Market Value
The assessed value of equipment based on actual market demand.
Fair Market Value Lease
A lease where the lessee has the option to purchase the equipment at fair market value, renew the lease (payments based on fair market value), or return the equipment to the lessor. An FMV lease provides tax advantages because the lessee can fully claim the lease payments as a business expense thus lowering the businesses taxable income. The lessor, as the owner of the equipment receives the benefit of claiming depreciation. This benefit is passed on to the lessee in the form of lower payments.
Lease
A legal contract where the owner (lessor) gives another party (lessee) the right to use a piece of equipment for a specified time in exchange for periodic payments.
Lessee
The equipment user.
Lessor
The equipment ower.
Master Lease Agreement
A contract that allows a lessee to acquire multiple assets overtime utilizing the same terms and conditions. This eliminates the need for negotiating and executing subsequent contracts.
Purchase Option
A provision that allows the lessee to purchase the equipment at the end of the lease. The purchase price may be stated as a specific amount or at fair market value.
Put Option
An agreement that legally requires the lessee or a third party to purchase the equipment at the end of the lease for a pre-specified amount.
Residual Value
The value of an asset at the end of a lease.
Sale-Leaseback
An arrangement that allows a business to turn an equipment purchase into an equipment lease. The lessor buys the equipment and becomes the equipment owner. This provides a cash flow boost to the business, but allows the business to continue to use the equipment. In turn, the lessor receives lease payments on the equipment.
True Lease or (FMV Lease)
A lease where the lessee has the option to purchase the equipment at fair market value, renew the lease (payments based on fair market value), or return the equipment to the lessor. An FMV lease provides tax advantages because the lessee can fully claim the lease payments as a business expense thus lowering the businesses taxable income. The lessor, as the owner of the equipment receives the benefit of claiming depreciation. This benefit is passed on to the lessee in the form of lower payments.
TRAC Lease
A TRAC lease is designed for commercial vehicles and trailers that generate revenue while in use. At the end of the term, the vehicle may be purchased for a pre-specified amount (usually 20%) or sold to a third party. If is it sold to a third party for more than the pre-specified amount, the lessee keeps the profit. If it is sold for less than the pre-specified amount, the lessee must still pay the specified amount to the lessor. This "adjustment clause" allows the lessee to fully claim the lease payment as a business expense thus lowering the businesses taxable income.
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