Base Term: The Base Term begins on the Base Term Commencement Date and is designated on the Equipment Schedule.

• Monthly Payment – rental payment that is made monthly
• Quarterly Payment – rental payment that is made quarterly

Base Term Commencement Date: The first day of the calendar month (or quarter) following the date that all Items of Equipment on a particular Equipment Schedule have been installed.

Capital Lease: A lease whereby any one of the criteria for an operating lease is not satisfied. From a financial reporting perspective, a lease that has the characteristics of a purchase agreement and also meets certain criteria established by FASB. Such a lease is required to be shown as an asset and related obligation on the balance sheet.

Conditional/Installment Sales Contract: A lease (capital) where at the conclusion of the Initial Term, title to the Items of Equipment is transferred to the lessee for some mandatory consideration, e.g., $1.00, 10% Balloon.

Cost of Capital: The weighted-average cost of the funds that a firm secured from both debt and equity sources in order to fund its assets. The use of a firm’s cost of capital is essential in making accurate capital budgeting and project investment decisions.

Cost of Debt: The cost incurred by a firm to fund the acquisition of assets through the use of borrowings. A firm’s component cost of debt is used in calculating the firm’s overall weighted-average cost of capital.

Debt Service Coverage Ratio:

Income Before Taxes & Interest + Depreciation & Amortization

Current Portion of Long-Term Debt (CPLTD)

Depreciation: A means for a firm to recover the cost of a purchased asset, over time, through periodic deductions of offsets to income. Depreciation is used in both a financial reporting and tax context, and is considered a tax benefit because the depreciation deductions cause a reduction in taxable income, thereby lowering a firm’s tax liability.

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 current purchase price, that the lessor estimates the equipment will retain at a specified point in the future.

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.

FASB 13: Financial Accounting Standards Board Statement 13, “Accounting for Leases,” which, along with its various amendments and interpretations, specifies the proper classification, accounting and reporting of leases by lessors and lessees.

First Amendment Clause: A clause which allows the lessee to purchase the equipment before term renewal.

Generally Accepted Accounting Principles (GAAP): Accounting standards established by the Financial Accounting Standard Board to assure that external financial statements are fair representations of the economic circumstances of a company. FASB 13, “Accounting for Leases,” details the practices for accounting for leases by both lessors and lessees.

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.

Investment Grade Credit: Generally refers to a lessee of high credit standing. Technically, an investment grade credit is a company rated highly by one of many recognized credit agencies such as Standard & Poor’s.

Lease: A contract through which an owner of equipment conveys the right to use the equipment to another party.

Lease Broker: An entity that provides one or more services in the lease transaction, but does not retain the lease transaction for its own portfolio.

Lease Line: A lease line of credit. A lessee can add equipment without having to renegotiate a new lease each time.

Lease Origination: A transaction whereby the lessor procures equipment from any source (including its own inventory) and enters into a lease agreement.

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.

Lessee: The entity leasing the equipment.

Lessor: The owner of equipment leased to a lessee or user. Also the party who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals.

Letter of Credit: A specific arrangement between a lessee and one of its banks. The bank agrees that in a defined event, the lessor can look to the bank instead of the lessee to make payment. This is similar to a security deposit in that it ensures the lessor will be paid under a lease.

MACRS: Modified Accounting Cost and Recovery Schedule, used by the IRS to determine the depreciation on the equipment purchased/financed.

Non-Recourse Debt: Where the lessor assigns the payment stream to a lending institution in exchange for a discounted present value payment.

Non-Tax Lease: A type of lease in which the lessee is, or will become, the owner of the leased equipment and, therefore, is entitled to all the risks and benefits (including tax depreciation) of equipment ownership.

Off Balance Sheet Financing: Any form of financing, such as an operating lease, that, for financial reporting purposes, is not required to be reported on a firm’s balance sheet.

Personal Guaranty: The guaranty of someone to be individually responsible for the obligations under the lease. Generally for Subchapter S closely held companies and small businesses.

Progress Payment: Occasionally, the Items of Equipment delineated on the Equipment Schedule may not install simultaneously. As an accommodation to the lessee, Varilease may fund some of the Items of Equipment prior to the Installation Date of the Equipment Schedule.

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: This is the value, expressed as a percentage of the current purchase price, that the lessor estimates an Item of Equipment will retain at a specified point in the future.

Return on Assets (ROA): A common measure of profitability based upon the amount of assets invested. ROA is equal to the ratio of either (1) net income to total assets, or (2) net income available to common stockholders to total assets.

Return on Equity (ROE): A measure of profitability related to the amount of invested equity. ROE is equal to the ratio of either (1) net income to owners’ equity, or (2) net income available to common stockholders to common equity.

Running Rate: The rate of return to the lessor, or cost to the lessee, in a lease based solely upon the initial equipment cost and the periodic lease payments, without any reliance on residual value, tax benefit, deposit or fees. This rate is also referred to as the street or stream rate.

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.

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.

Synthetic Lease: Treated as a loan for tax purposes and as an operating lease (off-balance-sheet financing) for accounting purposes. Relies on lessee to either take the FMV purchase option or pay substantial penalty for non-renewal.

Tangible Net Worth (TNW): Tangible net worth is defined, as of the most recent fiscal-year-end reporting period, as a lessee’s retained earnings plus paid-in capital less all of the intangible assets.

Tax Lease: A generic term for a lease in which the lessor takes in the risks of ownership (as determined by various IRS pronouncements) and, as the owner, is entitled to the benefits of ownership, including the tax benefits of depreciation.

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

Vendor: An entity that provides leased property to customers.