Glossary

 

Accelerated Depreciation

A depreciation method, such as the Modified Accelerated Cost Recovery System, that allows write-offs more quickly than the straight-line method, which allows write-offs in equal increments as tax in each tax year. This depreciation is useful for companies with tax bills that can offset taxable income. (Courtesy www.elfaonline.org) Back to Top

 

Advance Payments

Payments made by the lessee at the inception of a leasing transaction, and thereafter during certain constant periods before the use of equipment or other capital asset occurs for which payment is made. (Courtesy: www.elfaonline.org) Back to Top

 

Annuity

A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. The holder is taxed only when they start taking distributions or if they withdraw funds from the account. All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferred until withdrawal. Annuity earnings are also tax-deferred so they cannot be withdrawn without penalty until a certain specified age. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. (Courtesy: www.wikipedia.org) Back to Top

 

Annuity Issuer

In the context of structured settlement, means an insurer that has issued a contract to fund periodic payments under a structured settlement. Back to Top

 

APR

Annual Percentage Rate. The effective rate taking into account compounding and other fees. The nominal rate of interest for a specified period (usually one year). (Courtesy www.elfaonline.org) Back to Top

 

Asset

Any item property owned by an individual or company that may be subject to a lease or serve as collateral for a loan. (Courtesy www.elfaonline.org) Back to Top

 

Asset Securitization

A securitization is the aggregation of large pools of financial assets, such as aircraft leases, credit card receivables, equipment leases, student and other loans which serve as collateral for securities issued by a special purpose entity. The investors (which could include the public) purchase an interest in the pool in the form of bonds which are typically rated by one or more rating agencies. The bonds represent debt obligations of the issuer. They are secured or “collateralized” by the pool of assets. Because the issuer is almost always a special purpose entity with no other source of payment, the cash flow from the pool of assets usually provides the only means to repay the bonds. (Courtesy www.elfaonline.org) Back to Top

 

Asset-Based Loan

A secured business loan in which the borrower pledges as collateral any or all of the assets used in the conduct of its business. In equipment finance, sometimes categorized as a type of asset-based finance, the asset could be virtually any capital asset, including a computer, furniture, fixtures, facilities, aircraft, vessels, rail cars, vehicles and software. (Courtesy www.elfaonline.org) Back to Top

 

Backup Servicer

An organization skilled in the servicing of financial transactions who agrees to assume the servicing obligations from an existing servicer if certain events of default occur with regard to the existing servicer. The Backup Servicer may maintain varying levels of readiness, commonly referred to as cold, warm or hot. While the role of a Backup Servicer varies from one transaction to another, Backup Servicers routinely receive, review and archive monthly or other periodic portfolio data files from the existing servicer and verify or reconcile monthly servicer reports. Back to Top

 

Bailment/Bailee

Describes a legal relationship in common law where physical possession of personal property, or chattel, is transferred from one person (the ‘bailor’) to another person (the ‘bailee’) who subsequently has possession of the property. It arises when a person gives property to someone else for safekeeping. (Courtesy www.wikipedia.org) Back to Top

 

Balloon Payment

A large, lump-sum payment scheduled at the end of a series of smaller periodic payments with respect to applicable loan and financing lease transactions. (Courtesy www.elfaonline.org) Back to Top

 

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. (Courtesy www.elfaonline.org) Back to Top

 

Basis Point

A unit of measurement equal to 1/100th of a percent. For example, 25 basis points = .25%. (Courtesy www.elfaonline.org) Back to Top

 

Big-Ticket (also known as Large-Ticket)

A market segment, represented by financing over $5 million. (Courtesy www.elfaonline.org) Back to Top

 

Broker

A company or person who arranges, for a fee, transactions between lessees and lessors with respect to a particular type of an asset. (Courtesy www.elfaonline.org) Back to Top

 

Business Process Outsourcing

Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions (or processes) to a third-party service provider. In the contemporary context, it is primarily used to refer to the outsourcing of business processing services to an outside firm, replacing in-house services with labor from an outside firm. (Courtesy www.elfaonline.org)Back to Top

 

Capital Assets

Property used in business for a period of more than a year, including machinery, equipment and other significant property. (Courtesy www.elfaonline.org)Back to Top

 

Capital Lease

A lease accounting concept under Financial Accounting Standard No. 13 (FAS 13) and not a legal concept. In accounting parlance, a lease should be classified and accounted for by a lessee as a purchase and by the finance company, or 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 payments is equal to 90 percent or more of the fair market value of the leased asset. A lease that fails all of these criteria is an operating lease for accounting purposes. (Courtesy www.elfaonline.org)Back to Top

 

Capped Fair Market Value Lease

A Fair Market Value Lease with a predetermined ceiling to limit fair market exposure at the end of the lease term. (Courtesy www.elfaonline.org)Back to Top

 

Captive Finance Company

A subsidiary financial institution whose primary or sole operation is the provision of credit for customers of the parent company. For example, a captive finance company owned by an auto manufacturer may make loans to consumers who want to purchase an automobile. Captive finance companies have historically been prominent in the automotive industry, leasing the purchase of cars from whichever company owns them. Captive finance companies are typically wholly owned subsidiaries. (Courtesy www.wikipedia.org)Back to Top

 

Certificate of Acceptance

A document that serves as proof that goods have been delivered to and accepted by the customer. (Courtesy www.elfaonline.org)Back to Top

 

Collateral

A document that serves as proof that goods have been delivered to and accepted by the customer. (Courtesy www.elfaonline.org)Back to Top

 

Comprehensive General Liability Insurance

A broad form of insurance that protects against all forms of liability, except those specified in the policy. (Courtesy www.elfaonline.org)Back to Top

 

Conditional Sale

A broad form of insurance that protects against all forms of liability, except those specified in the policy. (Courtesy www.elfaonline.org)Back to Top

 

Conditional Sale (Time Sale)

An agreement in which the seller retains title to the equipment and transfers it to the buyer when all contractual payments have been made. (Courtesy www.elfaonline.org)Back to Top

 

Conditional Sales Lease

A lease that is a disguised financing or conditional sale agreement. Although the document looks like a lease, it typically requires a substantial advance rent or down payment that may cause a court to treat the transaction as a secured loan. It is not a finance “lease” as defined in UCC Article 2A. (Courtesy www.elfaonline.org)Back to Top

 

Coterminous

Two or more leases that are linked so that both will terminate at the same time. (Courtesy www.elfaonline.org)Back to Top

 

Covenant

A clause in a contract, usually required by the finance company, that either requires the borrower to do a particular thing or refrain from doing a particular thing. (Courtesy www.elfaonline.org)Back to Top

 

Cross Corporate

A guarantee by one person or entity to pay the lease or loan obligations of another (often affiliated) person or entity. (Courtesy www.elfaonline.org)Back to Top

 

Custodian

A person serving in a custodial capacity on behalf of an SPE, interest holder or indenture trustee.Back to Top

 

Delivery and Acceptance Certificate

A document that evidences the delivery and acceptance of a good, such as equipment, by the customer. (Courtesy www.elfaonline.org)Back to Top

 

Depreciation

A document that evidences the delivery and acceptance of a good, such as equipment, by the customer. (Courtesy www.elfaonline.org)Back to Top

 

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, or today’s, dollars. Use of a discount rate reflects the time value of money from future cash flows. (Courtesy www.elfaonline.org)Back to Top

 

Documentation Fee

A fee charged for preparing, distributing and storing transaction documents in any finance transaction. (Courtesy www.elfaonline.org)Back to Top

 

Dollar Buyout

The same as a Dollar-Out Lease under “Types of Leases.” (Courtesy www.elfaonline.org)Back to Top

 

Down Payment

A sum payable to a seller of property as initial consideration for the purchase of the property. Such amount may be or become non-refundable under certain circumstances as damages for failing to perform under the purchase contract. (Courtesy www.elfaonline.org)Back to Top

 

Early Buy-Out

The period during which an asset is expected to be useful in trade or business. Used for purposes of calculating the maximum allowable term of a tax lease, for determining whether or not the lease is a Capital Lease, or to determine the method of depreciation for a capitalized leased asset. May or may not be the same as the life used for income tax purposes. (Courtesy www.elfaonline.org)Back to Top

 

Economic Life (Useful Life)

The period of time during which an asset will have economic value and be usable. (Courtesy www.elfaonline.org)Back to Top

 

Effective Lease Rate

The effective rate (to the customer) of cash flows resulting from a finance transaction. To compare this rate on an after-tax basis as compared to a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities. (Courtesy www.elfaonline.org)Back to Top

 

Equipment Schedule

A document that describes in detail the equipment being leased, the financial terms and other terms, including the lease term, commencement date, repayment schedule and location of the equipment, as a supplement to the primary terms found in the related master lease. (Courtesy www.elfaonline.org)Back to Top

 

Equity Participant

A document that describes in detail the equipment being leased, the financial terms and other terms, including the lease term, commencement date, repayment schedule and location of the equipment, as a supplement to the primary terms found in the related master lease. (Courtesy www.elfaonline.org)Back to Top

 

Estimated Useful Life

The period during which an asset is expected to be useful in trade or business. Used for purposes of calculating the maximum allowable term of a tax lease, for determining whether or not the lease is a Capital Lease, or to determine the method of depreciation for a capitalized leased asset. May or may not be the same as the life used for income tax purposes. (Courtesy www.elfaonline.org)Back to Top

 

Fair Market Purchase Option

An option to purchase leased property at the end of the lease term at its then fair market value. (Courtesy www.elfaonline.org)Back to Top

 

Fair Market Value

The price for which property can be sold in an “arms length” transaction between informed and willing parties, each of which is acting rationally and in its own best interest based on the assumption that the equipment or other capital asset is in a known or required condition. (Courtesy www.elfaonline.org)Back to Top

 

FAS 13

Financial Accounting Standards No. 13 of the Financial Accounting Standards Board, which establishes standards for lessees’ and lessors’ accounting and reporting for leases. FAS 13 includes the characterization of a lease as an operating lease or capital lease for the lessee’s purposes. A company’s assets, liabilities and net income will differ depending on how it chooses to structure its leases. The provisions of FAS 13 derive from the view that a lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee (a capital lease) and as a sale or financing by the lessor. Other leases should be accounted for as the rental of property (operating leases). (Courtesy www.elfaonline.org)Back to Top

 

FASB

The Financial Accounting Standards Board, which sets accounting rules in the United States, subject to certain oversight by federal governmental agencies. (Courtesy www.elfaonline.org)Back to Top

 

Finance Lease

A finance lease, in a business sense, is typically a full-payout, non-cancellable agreement in which the customer is responsible for maintenance, taxes and insurance. However, the term “finance lease” also refers in Article 2A of the Uniform Commercial Code (UCC) to a special type of “lease” in which the lessor, lessee and the manufacturer have contractual relationships and the lessor at all times, with the lessees acknowledgement, remains a passive investor where the lessee makes most equipment decisions directly with the manufacturer. (Courtesy www.elfaonline.org)Back to Top

 

First Amendment Lease

A lease that provides the lessee with a purchase option at one or more defined points during the lease term. The customer must renew or continue the use of equipment under the lease if the purchase option is not exercised. The option price is usually either a fixed price intended to approximate fair market value, or is defined as fair market value, determined by the lessee’s appraisal, and subject to a price floor that insures the finance company’s residual position will be covered if the purchase option is exercised. If the purchase option is not exercised, then the lease is automatically renewed for a fixed term (typically 12 or 24 months) at a fixed rental intended to approximate fair rental value, which will further reduce the lessor’s end-of-term residual position. The lessee is not permitted to return the equipment on the option exercise date. If the lease is automatically renewed, then at the expiration of that initial renewal term, the lessee typically has the right either to return the equipment without penalty or to renew or purchase at fair market value. (Courtesy www.elfaonline.org)Back to Top

 

Fixed Asset

A tangible asset, such as furniture, fixtures or equipment held for business use. (Courtesy www.elfaonline.org)Back to Top

 

Fixed Price Purchase Option

TAn option given to the lessee to purchase leased equipment from the lessor on the option date for a certain price. Both the date and price must be determined at the inception of the lease. A fixed price purchase option could equal as little as 10-15 percent of the original cost of the equipment. (Courtesy www.elfaonline.org)Back to Top

 

Full Payout Lease

A lease in which the finance company recovers, through the lease payments, all investment incurred in the lease transaction, plus an acceptable rate of return, without any reliance upon the future residual value of the equipment. (Courtesy www.elfaonline.org)Back to Top

 

Guarantor

One who guarantees a debt or obligation of another person or entity. (Courtesy www.elfaonline.org)Back to Top

 

Guaranty

An agreement by one party to accept responsibility for a financial obligation of another person. The guarantor’s obligation is generally triggered when the primary person or entity does not satisfy the guaranteed obligation. (Courtesy www.elfaonline.org)Back to Top

 

Hell-or-High-Water Clause

A clause that assures a lessor that it will be paid rent no matter what the circumstances. That remains true even if the lessor allegedly breaches its obligations. The lessor’s wrongful act is treated as a separate and independent event and does not affect the lessee’s obligation to perform under the lease. This extremely important clause turns leases into financial assets that lessors can assign to other financial institutions. (Courtesy www.elfaonline.org)Back to Top

 

Incremental Borrowing Rate

The rate that, at the inception of the lease, the lessee would incur to borrow over a similar term the funds necessary to purchase the leased asset. In other words, the interest rate a lessee would have to pay if, instead of leasing, the lessee finances the purchase of the same asset. (Courtesy www.elfaonline.org)Back to Top

 

Indenture Trustee

A person serving as trustee under an indenture entered into in connection with a trust created as security for the issuance of rated securities.Back to Top

 

Insurable Value

The agreed or stated value, or other appropriate value, of equipment or other capital assets after all exclusions, such as maintenance or service charges, that an insurance company will provide casualty or property insurance to cover losses or damage to the equipment or other capital asset. (Courtesy www.elfaonline.org)Back to Top

 

Lease

A contract that includes an option for the lessee either to renew the lease at fair market rental value or to purchase the equipment for its fair market value at the end of the lease term. Fair market value exists when a willing buyer and a willing seller agree on rent or purchase price, respectively, assuming the equipment is in the condition required by the lease in which the option is granted. A lease may contain either or both options. (Courtesy www.elfaonline.org)Back to Top

 

Lease Assignment

The transfer of a lease by a lessee to a third party. Many leases contain clauses that restrict or prohibit lease assignment. Certain restrictions on assignments may not be enforceable under the UCC. (Courtesy www.elfaonline.org)Back to Top

 

Lease Line

A specific amount of funding arrangement designated by the lessor for a lessee to use over a fixed commitment period typically arranged under a Master Lease. (Courtesy www.elfaonline.org)Back to Top

 

Lease Purchase Contract

Full payout, net leases structured with a term equal to the equipment’s estimated useful life. Because many lease purchases include a bargain purchase option for the lessee to purchase the equipment for one dollar at the expiration of the lease, these leases are often referred to as dollar buyout or dollar-out leases. Lease Purchases are generally considered to be Capital Leases from an accounting perspective and non-tax leases from a tax perspective due to their bargain purchase option and length of lease term. (Courtesy www.elfaonline.org)Back to Top

 

Lease Rate (Rental Payment)

A percentage rate equivalent to the periodic rental payment to be paid in dollars (often computed by applying the rate to the lease balance). (Courtesy www.elfaonline.org)Back to Top

 

Lease Syndication

The process of involving several different funding sources in providing various percentages of a particular lease’s debt and equity components. (Courtesy www.elfaonline.org)Back to Top

 

Lessor

The party to a true lease agreement who has legal, beneficial or tax title to the equipment, grants the lessee the right to use and possess the equipment for the lease term, and is entitled to the rentals. (Courtesy www.elfaonline.org)Back to Top

 

Leveraged Lease

A lease in which the finance company invests equity into the purchase of equipment or other capital asset, and borrows the balance from a lender to make the purchase. For example, a lessor may invest 20 percent and borrow 80 percent to buy the equipment or other capital asset. (Courtesy www.elfaonline.org)Back to Top

 

Limited Guarantee

An agreement by a person or entity to pay the obligation of another up to a cap or limit on the total payment. A guarantor is a surety, a back up person or entity who pays should the original obligor, such as a lessee, borrower or buyer, fail to perform. (Courtesy www.elfaonline.org)Back to Top

 

Line of Credit

An arranged amount of credit that a lender may advance a borrower under various types of credit agreements. Such advances may be based on several factors, such as inventory, accounts receivable and equipment as collateral and creditworthiness of the borrower. (Courtesy www.elfaonline.org)Back to Top

 

MACRS Class Life

The life of equipment depreciated via the Modified Acceleration Cost Recovery System. (courtesy www.elfaonline.org)Back to Top

 

Master Lease

A lease contract in which the customer leases currently needed assets and is able to acquire other equipment under the same basic terms and conditions without negotiating a new lease contract. Typically, the customer signs a schedule and related documents to add the new equipment. (Courtesy www.elfaonline.org)Back to Top

 

Merchant Cash Advance

A Merchant Cash Advance is a lump sum payment to a business in exchange for an agreed upon percentage of future credit card and/or debit card sales. The business authorizes the merchant cash advance company to take a percentage of its daily credit card income directly from the processor that clears and settles the credit card payments. Once the obligation has been met, usually in a year or less, the automatic deductions stop. Merchant cash advances are not loans – they are a sale of a portion of future credit and/or debit card sales. (Courtesy www.wikipedia.org)Back to Top

 

Middle Market

A market segment generally represented by financing under $5 million and dominated by single investor leases. (Courtesy www.elfaonline.org)Back to Top

 

Municipal Lease

A financial contract between a state or local government, such as a county, city, town, state university or municipal authority, or the federal government, and a financier. The financier often encounters specialized risks associated with the governmental rights and powers of the customer. (Courtesy www.elfaonline.org)Back to Top

 

Negative Amortization

An increase in debt that occurs over time when payments made are insufficient to cover the interest due with each payment. (Courtesy www.elfaonline.org)Back to Top

 

Net Lease

A property lease in which the customer agrees to pay all expenses normally associated with ownership, such as taxes, maintenance and insurance. (Courtesy www.elfaonline.org)Back to Top

 

Non-Recourse Loan

A type of loan for which the sole payment source is the collateral or its cash flow; and the only remedy available to the lender in the event of default is to foreclose on the collateral. The borrower is not personally liable for repayment. This type of loan is most often seen in leveraged leases and in various loans made in respect of lease interests in equipment or other capital assets. (Courtesy www.elfaonline.org)Back to Top

 

Off-Balance-Sheet Financing

Financing that, due to the application of FAS 13, does not appear on balance sheets of a lessee as a liability or asset; rather, the cost of the lease is treated as an expense. (Courtesy www.elfaonline.org)Back to Top

 

Open-End Lease

A conditional sale lease in which the customer guarantees that the finance company will realize a minimum value from the sale of the asset at the end of the lease. See TRAC Lease. (Courtesy www.elfaonline.org)Back to Top

 

Operating Lease

A business concept (not the accounting concept under FAS 13) in which the lease lasts for short-term of use of equipment by the lessee. The finance company retains ownership of the equipment and expects the lessee to return the equipment at the end of a term of three to 10 years. The lessor realizes its return through higher rents and residual value, which usually requires and results from sales or re-leasing of the returned equipment. Additional services, such as maintenance and insurance, may be provided by the lessor. (Courtesy www.elfaonline.org)Back to Top

 

Payee

In the context of a structured settlement, means an individual who is receiving tax free payments under a structured settlement and proposes to make a transfer of payment rights thereunder.Back to Top

 

Payment In Advance

Payment made before the actual obligation arises for which payment is due. (Courtesy www.elfaonline.org)Back to Top

 

Payment In Arrears

Payment made after the obligation arises and payment becomes due has been incurred by the debtor. (Courtesy www.elfaonline.org)Back to Top

 

Peer-to-Peer Lending

Person-to-person lending (also known as peer-to-peer lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is a certain breed of financial transaction (primarily lending and borrowing, though other more complicated transactions can be facilitated) which occurs directly between individuals or “peers” without the intermediation of a traditional financial institution. Person-to-person lending is for the most part a for-profit activity. (Courtesy www.wikipedia.org)Back to Top

 

Periodic Payments

In the context of a structured settlement, includes both recurring payments and scheduled future lump sum payments.Back to Top

 

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. (Courtesy www.Elfaonline.org)Back to Top

 

Purchase Option

A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specified amount or at fair market value. (Courtesy www.elfaonline.org)Back to Top

 

Put Option

The requirement of a lessee 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. (Courtesy www.elfaonline.org)Back to Top

 

Qualified Assignment Agreement

In the context of structured settlements, means an agreement providing for a qualified assignment within the meaning of section 130 of the United States Internal Revenue Code, United States Code Title 26, as amended from time to timeBack to Top

 

Recourse Agreement

An agreement with a vendor whereby the vendor will purchase or repurchase the lessor’s interest in a lease, usually upon demand, after default of the lessee. Generally, the lease must be in default and a reasonable amount of collection effort must be made by the lessor. (Courtesy www.elfaonline.org)Back to Top

 

Refinance

To pay off an existing loan with a new one while using the same property as collateral. (Courtesy www.elfaonline.org)Back to Top

 

Remarketing

The process of selling or leasing of used equipment or other capital assets performed by equipment management personnel of the lessor or independent parties. (Courtesy www.elfaonline.org)Back to Top

 

Replevin

In creditors’ rights law, replevin, sometimes known as “claim and delivery,” is a legal remedy for a person to recover goods unlawfully withheld from his or her possession, by means of a special form of legal process in which a court may require a defendant to return specific goods to the plaintiff at the outset of the action (i.e. before judgment). In other situations, a party seeking relief may elect to adjudicate the right to possession prior to obtaining immediate relief to obtain the property in question. In such cases, replevin actions are still designed to afford the petitioning party a relatively speedy process for obtaining judgment, as compared to typical lawsuits. (Courtesy www.wikipedia.org)Back to Top

 

Residual Value

The value of an asset at the conclusion of a lease. (Courtesy www.elfaonline.org)Back to Top

 

Royalty

Royalties are usage-based payments made by one party (the “licensee”) and another (the “licensor”) for ongoing use of an asset, sometimes an intellectual property (IP). Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments, often used in the oil industry and music industry to describe a percentage ownership of future production or revenues from a given leasehold, which may be divested from the original owner of the asset. (Courtesy www.wikipedia.org)Back to Top

 

Sale-Leaseback

An arrangement in a finance company purchases equipment from the business using the equipment. The finance company then becomes the equipment owner, and leases the equipment back to the original owner, which continues to use the equipment without disruption. (Courtesy www.elfaonline.org)Back to Top

 

Sales/Use Tax

States impose sales taxes on retail sale transactions. States impose use taxes for tangible personal property that is used, consumed or stored in the state. (Courtesy www.elfaonline.org)Back to Top

 

Securitization

The financial practice of pooling various types of contractual debt such as auto loans, equipment leases or credit card debt obligations and selling said debt as bonds or pass-through securities to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities, while those backed by other types of receivables are asset-backed securities. The so-called lower risk of securitized instruments attracts a greater number of investors seeking to benefit in the process of taking many individual assets and repackaging them as Collateralized debt obligation. (Courtesy www.wikipedia.org)Back to Top

 

Settled Claim

In the context of a structured settlement, means the original tort claim or workers’ compensation claim resolved by a structured settlement.Back to Top

 

Short-Term Loan

Loans usually structured to last one year or less, and often paid at the end of the term in a lump sum. (Courtesy www.elfaonline.org)Back to Top

 

Special Purpose Entity (SPE)

A special purpose entity is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives. SPEs are typically used by companies to isolate the firm from financial risk. A company will transfer assets to the SPE for management or use the SPE to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk. SPEs are also commonly used in complex financings to separate different layers of equity infusion. In addition, they are commonly used to own a single asset and associated permits and contract rights to allow for easier transfer of that asset. Often it is important that the SPE not be owned by the entity on whose behalf the SPE is being set up (the sponsor). For example, in the context of a loan securitization, if the SPE securitization vehicle were owned or controlled by the bank whose loans were to be secured, the SPE would be consolidated with the rest of the bank’s group for regulatory, accounting, and bankruptcy purposes, which would defeat the point of the securitization. (Courtesy www.Wikipedia.org)Back to Top

 

Spread

The difference between funding costs and the rate of return to the lessor on a lease. (Courtesy www.elfaonline.org)Back to Top

 

Statement on Auditing Standards 70

Statement on Auditing Standards No. 70: Service Organizations, commonly abbreviated as SAS 70, is an auditing statement issued by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA). SAS 70 provides guidance to service auditors when assessing the internal controls of a service organization and issuing a service auditor’s report. SAS 70 also provides guidance to auditors of financial statements of an entity that uses one or more service organizations. Service organizations are typically entities that provide outsourcing services that impact the control environment of their customers. There are two types of service auditor reports. A Type I service auditor’s report includes the service auditor’s opinion on the fairness of the presentation of the service organization’s description of controls that had been placed in operation and the suitability of the design of the controls to achieve the specified control objectives. A Type II service auditor’s report includes the information contained in a Type I service auditor’s report and also includes the service auditor’s opinion on whether the specific controls were operating effectively during the period under review. (Courtesy www.wikipedia.org)Back to Top

 

Step Lease

A financial contract in which the rent may change during the term of the lease contract. The rent change is known at inception, and is agreed upon by the financing company and lessee. Often a step-up lease allows the lessee to pay less initially and more later in the term. A step down lease works in the reverse manner, allowing the lessee to pay more initially and less later as the payment amount decreases over the term of the lease contract. These contracts are sometimes referred to as a “low-high” and a “high-low” lease structure, respectively. (Courtesy www.elfaonline.org)Back to Top

 

Stipulated Loss Value

A schedule included in a lease that states the agreed value of equipment at various times during the term of the lease and establishes the liability of the lessee to the lessor in the event that the leased equipment is lost or rendered unusable during the lease term due to a casualty loss. (Courtesy www.elfaonline.org)Back to Top

 

Structured Settlement

Means an arrangement for periodic payment of damages for personal injuries or sickness established by settlement or judgment in resolution of a tort claim or for periodic payments in settlement of a workers’ compensation claim.Back to Top

 

Structured Settlement Agreement

Means the agreement, judgment, stipulation, or release embodying the terms of a structured settlement.Back to Top

 

Structured Settlement Obligor

Means, with respect to any structured settlement, the party that has the continuing obligation to make periodic payments to the payee under a structured settlement agreement or a qualified assignment agreement.Back to Top

 

Successor Servicer

An organization skilled in the servicing of financial transactions who agrees to assume the servicing obligations of a predecessor servicer if certain events of default occur with regard to the predecessor servicer. Typically, the Successor Servicer is first appointed the Backup Servicer and only becomes the Successor Servicer when so appointed by the investor, trustee or similar party after a predecessor servicer event of default.Back to Top

 

Syndications

Participations of financial institutions in a sale and/or assignment of all or part of an underlying lease or loan transaction. For example, the lease rentals from a transaction originated by a lessor may be assigned to another financier as collateral for a loan to the assigning lessor or as an outright sale of lease rental stream. (Courtesy www.elfaonline.org)Back to Top

 

Synthetic Lease

A financing agreement structured to be treated as a lease for accounting purposes, but as a loan for tax purposes. Synthetic leases may be used by corporations seeking off-balance sheet reporting of the asset-based financing, and which take the tax benefits of owning the financed equipment. (Courtesy www.elfaonline.org)Back to Top

 

Tax Lease

Revenue Procedure 2001-28 (Rev. Proc. 2001-28) establishes criteria for classifying a lease as a true lease for federal income tax purposes. It is the successor to Revenue Procedure 75-21, 1975-1 C.B. 715 and other related revenue procedures. Technically, Rev. Proc. 2001-28 establishes criteria for obtaining an advance ruling from the Internal Revenue Service (IRS) that a lease is a “true lease” as contrasted with a conditional sale. It is also used to determine whether a simple lease between a lessor and a lessee is a “true lease” for tax purposes, which entitles the lessor to take tax benefits arising from the purchase and lease of equipment to the lessee. (Courtesy www.elfaonline.org)Back to Top

 

Tax-Exempt Entity

A business or group that is not subject to taxation, such as a philanthropic organization, state college, governmental subdivision (i.e., city or county) or other government organization. (Courtesy www.elfaonline.org)Back to Top

 

Term Loan

Financing generally used for working capital, expansion, refinancing and acquisitions; repaid monthly or other agreed interval for a specified term. (Courtesy www.elfaonline.org)Back to Top

 

Titling Trust

An SPE (generally a business trust) set up for the sole purpose of being the owner of record of certificate-of-title collateral and holding such title for the benefit of designated parties.Back to Top

 

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)Back to Top

 

Transfer

In the context of a structured settlement, means any sale, assignment, pledge, hypothecation or other alienation or encumbrance of structured settlement payment rights made by a payee for consideration; provided that the term “transfer” does not include the creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution, in the absence of any action to redirect the structured settlement payments to such insured depository institution, or an agent or successor in interest thereof, or otherwise to enforce such blanket security interest against the structured settlement payment rights.Back to Top

 

Transfer Agreement

In the context of a structured settlement, means the agreement providing for a transfer of structured settlement payment rights.Back to Top

 

Transferee

In the context of a structured settlement, means a party acquiring or proposing to acquire structured settlement payment rights through a transfer.Back to Top

 

True Lease

A lease is generally described in state law as a lease of property as described in UCC Article 2A-103(1)(j). However, a true lease involves other considerations. Section 1-201(37) of the UCC (1-201(37)) includes a “per se” or “bright-line” test to determine whether a transaction should be treated as a true lease or disguised security agreement. This test requires an objective analysis and is supposed to disregard the documents’ labels and the parties’ intent. Current law also includes an “economic realities” test designed to evaluate the facts of each transaction to determine whether the transaction is a lease or disguised financing. The bright-line and economic realities together have created confusing and inconsistent law affecting the leasing industry in determining whether a transaction constitutes a true lease. (Courtesy www.elfaonline.org)Back to Top

 

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, as appropriate. A leveraged lease often has two trustees: an owner trustee and an indenture trustee. An owner trust owns the assets or interests therein and the indenture trustee represents the lenders that lend funds to the lessor on a non-recourse basis to purchase the equipment or other capital asset for lease to the lessee. (Courtesy www.elfaonline.org)Back to Top

 

Uniform Commercial Code (UCC)

A statute which prescribes very similar rules in almost every state in the U.S. for secured transactions, leasing and other commercial and financial transactions. The UCC is intended to represent the best practices in commercial transactions and, in certain parts of the UCC, consumer transactions. (Courtesy www.elfaonline.org)Back to Top

 

Unsecured Loan

A loan that is not secured by assets, but is based solely on the creditworthiness of the customer. (Courtesy www.elfaonline.org)Back to Top

 

Upgrade

An improved and/or updated version of equipment or software, most often used with technology assets. (Courtesy www.elfaonline.org)Back to Top

 

Use Tax

Many states charge a “use” tax in lieu of a sales tax when equipment is leased. In practice, instead of paying a sales tax for purchase of the leased equipment, the lessor collects or lessees directly pay use taxes with respect to each rent period as a percentage of the rentals over the lease term. (Courtesy www.elfaonline.org)Back to Top

 

Useful Life

The period of time during which an asset will have economic value and be usable. The useful life of an asset is sometimes called its economic life. (Courtesy www.elfaonline.org)Back to Top

 

Vendor

An entity that sells goods and may provide services to customers. (Courtesy www.elfaonline.org)Back to Top

 

Vendor Leasing

A working relationship between a financing source and a vendor to provide financing to stimulate the vendor’s sales. The financing source typically offers leases or conditional sales and, in some cases, service contracts to the vendor’s customers. (Courtesy www.elfaonline.org)Back to Top