Glossary of Terms

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TRAC Lease

A lease that contains a special provision called a "terminal rental adjustment clause." TRAC leases apply to motor vehicles (including trailers) used more than 50 percent of the time in the trade or business of the lessee. Sometimes called an "open-end lease," a TRAC lease requires the lessee to make an unknown (open-ended) payment to the lessor at the end of the lease term. This "terminal rent" payment makes up any shortfall due to the lessor if the lessor does not receive proceeds of a sale or other disposition of the vehicle sufficient to recover its investment plus its return on the investment. The transaction looks and works like a balloon loan because the lessor transfers all residual value risk to the lessee. The lessor realizes residual value either when the lessee exercises an option to purchase the asset at the end of the lease at a stipulated amount or when the lessor sells the asset to a third-party. If the disposition of the vehicle results in excess proceeds, the lessee generally retains the excess. (Courtesy www.elfaonline.org)

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