We hope this list helps you to learn about leasing and financing. If you have further questions about these terms, please contact our Sales Representatives.

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 tax payer’s AMTI is the accelerated portion of depreciation, thereby making it more likely that a taxpayer that purchases equipment outright 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 customers, vendors and funding sources.

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/debtor acknowledges that the equipment has been delivered, is acceptable, has been manufactured or constructed according to specifications, and is operational.

CREDITOR The party to a finance agreement who has a security interest to the equipment for the term of the contract, and is entitled to the monthly payments.

DEBTOR The owner and user of the equipment that is being financed and required to make monthly payments.

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.

EQUIPMENT FINANCE AGREEMENT (EFA) The EFA is in actuality a loan to the customer (debtor) using the equipment asset as collateral. The debtor usually pays for the equipment and takes all the ownership benefits and responsibilities. The creditor (usually Pacifica Capital) reimburses the debtor for the equipment and collects the monthly payments. The creditor holds a security interest in the equipment until the loan is paid in full.

EQUIPMENT SCHEDULE A document that describes in detail the equipment being leased. It may also state the lease term, vendor, 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 (See Single Investor 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.

HELL-OR-HIGH-WATER CLAUSE A clause in an agreement that reiterates the unconditional obligation of the lessee/debtor to pay rent or make payments for the entire term, regardless of any event affecting the equipment or any change in the circumstances of the agreement.

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 other lenders provide the balance on a non-recourse debt basis. The lessor receives the tax benefits of ownership.

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.

OPEN-END LEASE A conditional sale lease in which the lessee guarantees 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 normally just a portion 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.

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.