Definition of Lease

Lease

A long-term rental agreement, and a form of secured long-term debt.

lease

Long-term rental agreement.

Break-even lease payment

The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.

Capital lease

A lease obligation that has to be capitalized on the balance sheet.

Cost of lease financing

A lease's internal rate of return.

Direct lease

lease in which the lessor purchases new equipment from the manufacturer and leases it to the
lessee.

Double-dip lease

A cross-border lease in which the disparate rules of the lessor's and lessee's countries let
both parties be treated as the owner of the leased equipment for tax purposes.

Financial lease

Long-term, non-cancelable lease.

Full-payout lease

See: financial lease.

Full-service lease

Also called rental lease. lease in which the lessor promises to maintain and insure the
equipment leased.

Lease Rate

The payment per period stated in a lease contract.

Leveraged lease

A lease arrangement under which the lessor borrows a large proportion of the funds needed
to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the
borrowing.

Limitation on sale-and-leaseback

A bond covenant that restricts in some way a firm's ability to enter into
sale and lease-back transactions.

Lease Rate

The payment per period stated in a lease contract.

Net lease

A lease arrangement under which the lessee is responsible for all property taxes, maintenance
expenses, insurance, and other costs associated with keeping the asset in good working condition.

Operating lease

Short-term, cancelable lease. A type of lease in which the period of contract is less than the
life of the equipment and the lessor pays all maintenance and servicing costs.

Rental lease

See:full-service lease.

Safe harbor lease

A lease to transfer tax benefits of ownership (depreciation and debt tax shield) from the
lessee, if the lessee could not use them, to a lessor that could use them.

Sale and lease-back

Sale of an existing asset to a financial institution that then leases it back to the user.
Related: lease.

Sales-type lease

An arrangement whereby a firm leases its own equipment, such as IBM leasing its own
computers, thereby competing with an independent leasing company.

True lease

A contract that qualifies as a valid lease agreement under the Internal Revenue code.

Leasehold improvements

The cost of improvements made to property that the company leases.

Capital lease

A lease in which the lessee obtains some ownership rights over the asset
involved in the transaction, resulting in the recording of the asset as company property
on its general ledger.

Leasehold improvement

This is any upgrade to leased property by a lessee that will be
usable for more than one year, and which exceeds the lessee’s capitalization limit.
It is recorded as a fixed asset and depreciated over a period no longer than the life
of the underlying lease.

Operating lease

The rental of an asset from a lessor, but not under terms that would
qualify it as a capital lease.

Accounting and Auditing Enforcement Release (AAER)

Administrative proceedings or litigation releases that entail an accounting or auditing-related violation of the securities laws.

Litigation Release

Official SEC record of a settlement or a hearing scheduled before a civil
court judge of an alleged violation of one or more sections or rules of the securities laws. Typically,
a litigation release entails a more serious violation of the securities laws than an administrative
proceeding.

Sales-type Lease

lease accounting used by a manufacturer who is also a lessor. Up-front gross
profit is recorded for the excess of the present value of the lease payments to be received across
a lease term over the cost to manufacture the leased equipment. Interest income also is recognized
on the lease receivable as it is earned over the lease term.

Capital Lease

One where substantially all of the benefits and risks of ownership are transferred to the lessee. It must be reflected on the company's balance sheet as an asset and corresponding liability.

Financial Lease

lease in which the service provided by the lessor to the lessee is limited to financing equipment. All other responsibilities related to the possession of equipment, such as maintenance, insurance, and taxes, are borne by the lessee. A financial lease is usually noncancellable and is fully paid out amortized over its term.

Lease Payment

The consideration paid by the lessee to the lessor in exchange for the use of the leased equipment/property. Payments are usually made at fixed intervals.

Operating Lease

One where the risks and benefits, as well as ownership, stays with the lessor.

Sale and Leaseback

An agreement in which the owner of a property sells that property to a person or institution and then leases it back again for an agreed period and rental.

Lease (Credit Insurance)

Contract granting use of real estate, equipment or other fixed assets for a specified period of time in exchange for payment. The owner or a leased property is the lessor and the user the lessee.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

Coverage ratios

Ratios used to test the adequacy of cash flows generated through earnings for purposes of
meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.

Cumulative abnormal return (CAR)

Sum of the differences between the expected return on a stock and the
actual return that comes from the release of news to the market.

Equipment trust certificates

Certificates issued by a trust that was formed to purchase an asset and lease it
to a lessee. When the last of the certificates has been repaid, title of ownership of the asset reverts to the
lessee.

Equivalent loan

Given the after-tax stream associated with a lease, the maximum amount of conventional
debt that the same period-by-period after-tax debt service stream is capable of supporting.

Event study

A statistical study that examines how the release of information affects prices at a particular time.

Fixed-charge coverage ratio

A measure of a firm's ability to meet its fixed-charge obligations: the ratio of
(net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid
plus long-term lease payments).

Leakage

Release of information to some persons before official public announcement.

Lessee

An entity that leases an asset from another entity.

Lessor

An entity that leases an asset to another entity.
Letter of comment A communication to the firm from the SEC that suggests changes to its registration
statement.

Long-term liabilities

Amount owed for leases, bond repayment and other items due after 1 year.

Lessor

An entity that leases an asset to another entity.

Net advantage to leasing

The net present value of entering into a lease financing arrangement rather than
borrowing the necessary funds and buying the asset.

Nonrecourse

Without recourse, as in a non-recourse lease.

Other long term liabilities

Value of leases, future employee benefits, deferred taxes and other obligations
not requiring interest payments that must be paid over a period of more than 1 year.

Residual value

Usually refers to the value of a lessor's property at the time the lease expires.

Wholesale mortgage banking

The purchasing of loans originated by others, with the servicing rights
released to the buyer.

Amortization

See depreciation, but usually in relation to assets attached to leased property.

current ratio

Calculated to assess the short-term solvency, or debt-paying
ability of a business, it equals total current assets divided by total current
liabilities. Some businesses remain solvent with a relatively low current
ratio; others could be in trouble with an apparently good current ratio.
The general rule is that the current ratio should be 2:1 or higher, but
please take this with a grain of salt, because current ratios vary widely
from industry to industry.

Fixed Charge Coverage Ratio

A measure of how well a company is able to meet its fixed
charges (interest and lease payments) based on the cash
generated by its operations. It is calculated by dividing the
earnings before interest and taxes by the total interest charges
and lease payments incurred by the firm.

material requisition form

a source document that indicates
the types and quantities of material to be placed into production
or used in performing a service; it causes materials
and its cost to be released from the Raw Material Inventory
warehouse and sent to Work in Process Inventory

Fixed cost

A cost that does not vary in the short run, irrespective of changes in any
cost drivers. For example, the rent on a building will not change until the lease
runs out or is re-negotiated, irrespective of the level of business activity within
that building.

Unissued stock

Stock that has been authorized for use, but which has not yet been
released for sale to prospective shareholders.

Restructuring Charge

A special, nonrecurring charge taken in conjunction with a consolidation
or relocation of operations, or the disposition or abandonment of operations or productive
assets. Such charges may include impairment losses as well as other expenses, such as writedowns
of other assets including accounts receivable and inventory, and accruals of liabilities for
so-called exit costs, including such expenses as lease terminations, closure costs, severance pay,
benefits, and retraining.

Configuration control

Verifying that a delivered product matches authorizing
engineering documentation. This also refers to engineering changes made subsequent
to the initial product release.

Inventory issue

A transaction used to record the reduction in inventory from a location,
because of its release for processing or transfer to another location.

Withdrawal

The release of items from storage.

Work-in-process

Any items being converted into finished goods or released from
the warehouse in anticipation of beginning the conversion process.

Leasing

Contract granting use of real estate, equipment, or other fixed assets for a specified time in exchange for payment, usually in the form of rent. The owner of the leased property is called the lessor, the user the lessee.
See Also:
* Capital lease
* Operating lease
* Sale and leaseback

Lessee

A person to whom a lease is granted; the user of the asset.

Lessor

A person who grants a lease; the owner of the asset.

Issue

When an item is approved and released for sale, or when a policy or sales contract is accepted.

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