Resources: Equipment Leasing

Tools - About Equipment Leasing

Lease- A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.

According to the U.S.. Small Business Administration, eight out of 10 American companies lease all or some of their productivity equipment-office IT networks, computers, phone systems, fax machines, copiers, furniture and fixtures, leasehold improvements, vehicles, heavy manufacturing and construction machinery.

The Finance Center provides companies with the means to finance these and many other types of personal property acquisitions.

The leasing industry is a major source of funds for capital investment. In 1998, more than $207 billion worth of equipment was leased nationwide, mostly by smaller, growth- and technology-oriented organizations.

Every year a growing number of companies choose to procure new productive equipment through leases rather than loans. Leasing has gained in popularity due to key factors that differentiate a lease from a loan.

A loan requires the end user to invest a down payment in the equipment- the loan finances the remaining amount. A lease requires no down payment and finances only the value of the equipment expected to be depleted during the lease term. At lease end, the lessee usually has an option to buy the equipment for its remaining value.

A loan usually requires the borrower to pledge other assets for collateral. To secure a lease transaction, the leased equipment itself is usually all that is needed.

When equipment is devalued due to new technology, a loan borrower bears all the risk. Since a lessee has no obligations to own equipment at the end of a lease, all risk of obsolescence is transferred to the lessors.

A larger portion of the financial obligation of a loan is paid in today's more expensive dollars. In a lease, more of the cash flow, especially the option to purchase the equipment, occurs later in the term when inflation makes dollars cheaper.

The use of leasing is continually increasing because American businesses recognize that the value of equipment comes from its use, not its ownership.

Through our reverse application process, the Finance Center provides sources of lease funding for companies looking to finance smaller-ticket equipment.

For end-user businesses making equipment acquisitions, the Finance Center provides access to lease financing from an array of lenders.

For equipment manufacturers, distributors, vendors and value-added resellers, the Finance Center's application process can help stimulate sales by providing equipment financing for their products. In offering their customers a total equipment acquisition solution, vendors are able to differentiate themselves from their competition, increase sales, reduce outstanding receivables, and decrease the sales cycle by eliminating the need for the customer to search for additional financing.

Among other key benefits, leasing:

Provides 100 percent financing and sidesteps potential problems like hefty down payments, monthly financing costs and shrinking credit lines.
Allows businesses to upgrade to new equipment or add on to existing models.
Provides a predictable, fixed-payment plan while satisfying current equipment needs.
Keeps lines of credit free for other uses.
Allows businesses to acquire equipment of higher quality and in bigger volumes, since leasing translates into less up-front cash and low monthly payments.
Provides a hedge against the risk of technological obsolescence.
Preserves cash for other expenditures.
Provides greater flexibility of purchase options.
Reduces paperwork and consolidates billing.
Eliminates the need to maintain complicated depreciation schedules.
Offers potential tax benefits.

The major benefits of leasing equipment through the Finance Center:

Speed
Confidentiality
Dynamic market competitive rates and terms

GLOSSARY

Accelerated Cost Recovery System (ACRS) (Modified): The Tax Reform Act of 1986, established the modified ACRS tax appreciation system by prescribing depreciation methods for each ACRS class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10, 15, or 20 year classes depending on ADR lives.
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 exemption 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.
Bargain Purchase Option: A lease provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception, that is substantially lower than the expected fair market value at the date the option can be exercised.
Big-Ticket: A market segment, generally dominated by leveraged leases, represented by lease financings over $2 million.
Broker: A company or person who arranges, for a fee, transactions between lessees and lessors of an asset.
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 payment 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, is acceptable, and has been manufactured or constructed according to specifications.
Direct Financing Lease (Direct Lease): A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.
Economic Life (Useful Life): The period of time during which an asset will have economic value and be usable.
Effective Lease Rate: The effective rate (to the lessee) of cash flows resulting from of 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.
Equity Participant: The owner participant, trustor owner, or grantor owner.
Equipment Schedule: A document that describes in detail the equipment being lease. 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.
Finance Lease: Typically, a finance lease is a full-payout, non-cancelable agreement, in which the lessee is responsible for maintenance, taxes, and insurance.
Full Payout Lease: A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus and acceptable rate of return, without any reliance upon the leased equipment's future residual value.
Guideline Lease: A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.
Hell-or-High-Water Clause: A clause in a lease that reiterates the unconditional obligation of the lessee 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.
Indemnity Clause: A clause in which the lessee indemnifies the lessor from loss of tax benefits.
Indenture of Trust (Indenture): An agreement between the owner trustee and the indenture trustee: The owner trustee mortgages the equipment and assigns the lease and rental payments under the lease as security for amounts due to the lenders. Same as a security agreement or mortgage.
Lease: A contract in which one part conveys the use of an asset to another party for a specific period of time at a predetermined rate.
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 for the lease term, and is entitled to the rentals.
Leveraged Lease: In this type of lease, the lessor provides an equity portion (usually 20 to 40 percent) of the equipment cost and lenders provide the balance on a non-recourse debt basis. The lessor receives the tax benefits of ownership.
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.
Middle Market: A market segment generally represented by financings under $2 million and dominated by single investor leases.
Net Lease: A lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.
Non-Recourse Loan: In a leveraged lease, the lenders cannot look to the lessor for repayment. The lender's only recourse is to the lessee and, therefore, the lessee's credit rating is of prime importance.
Open-End Lease: A conditional sale lease in which the lessee guarantee that the lessor will realize a minimum value from the sale of the asset at the end of the lease.
Operating Lease: Any lease that is not a capital lease. These are generally used for short 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.
Packager: The leasing company, investment banker, or broker who arranges a leverage lease.
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.
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.
Residual Value: The value of an asset at the conclusion of a lease.
Sale-Leaseback: An arrangement whereby equipment is purchased by a lessor from the company owning and using it. The lessor then becomes the owner and leases it back to the original owner, who continues to use the equipment.
Sales-Type Lease: A lease by a lessor who is the manufacturer or dealer, in which the lessee meets the definitional criteria of a capital lease or direct financing lease.
Single Investor Lease (See Full Payout of Finance Lease): A tax-oriented lease whereby the lessor achieves its desired rate of return via a combination of the rental payments, depreciation, and the fair market value of the equipment at the end of the original lease term. Because of the value of the tax benefit, the rental payments will be lower than for a finance lease.
Tax Lease: A lease wherein the lessor recognizes the tax incentives provided by the tax laws for investment and ownership of equipment. Generally, the lease rate factor on tax leases is reduced to reflect the lessor's recognition of this tax incentive.
TRAC Lease: A tax-oriented lease of motor vehicles or trailers that contains a terminal rental adjustment clause and otherwise complies with the requirements of the tax laws.
True Lease: A type of transaction that qualifies as a lease under the Internal Revenue Code. It allows the lessor to claim ownership and the lessee to claim rental payment as tax deductions.
Trustee: A bank or trust company that holds title to or a security interest in leased property for the benefit of the lessee, lessor, and/or creditors of the lessor. A leveraged lease often has two trustees: an owner trustee and an indenture trustee.
Vendor Leasing: A working relationship between a financing source and a vendor to provide financing to stimulate the vendor's sales. The financing source offers leases or conditional sales contracts to the vendor's customers. The vendor leasing firm substitutes as the captive finance company of a manufacturer or distributor through the extension of leasing to customers, provisions for credit checking, and performance of collections and operational administration. Also known as lease asset servicing or vendor programs.