Glossary of Terms

AAA Rating

There are a number of agencies that provide opinions and ratings about the security of companies, shares and bonds. ‘AAA’ rating is given to the most secure investments.

Accelerated Cost Recovery System (ACRS) (Modified)

The Tax Reform Act of 1986 established the modified ACRS tax appreciation system prescribing depreciation methods for each ACRS class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10,15, or 20-year classes depending on ADR lives.

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 exemptions 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 taxpayer's AMTI is the accelerated portion of depreciation, thereby making it more likely that a taxpayer that buys equipment may be subject to the AMT rather than to regular tax.

Amortisation

To pay off principal and interest under a loan over a period of time, usually by instalments.

Application fee

A fee paid by a borrower to cover the costs of processing a loan and mortgage.

B

BAD

(Bank Account Debit Tax) State or Territory government tax (except ACT) on withdrawals from bank accounts with a cheque facility.

Bank Bill Swap Reference Rate

A market rate of interest that is widely used to price commercial borrowings. The Bank Bill Swap Reference Rate can be found in national newspapers.

Basis Point

A term used to measure the rate of interest. For example, ten basis points equal 0.10%.

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 financing over $2 million.

Broker

A company or person who arranges, for a fee, transactions between lessees and lessors of an asset.

C

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 payments 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 acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

Certificate of Title

A document that details the ownership and land dimensions of a property and lists any encumbrances on it.

Conditional Sale

A situation under the income tax provisions whereby the actual user is seen as the owner of an asset for availing the capital allowances. In India, a conditional sale will include the Hire Purchase transaction.

Consumer Credit Code

The Consumer Credit Code is a law that protects individuals (and strata corporations — but not other companies) who are borrowing money predominantly for personal, domestic, or household purposes. The Consumer Credit Code applies to such loans regardless of the size of the loan and gives borrowers certain rights and requires lenders to give borrowers certain information about their loan.

Conveyancing

The process of legally transferring property ownership from the seller’s name to the buyer’s name.

Contract

An agreement between two or more people that is enforceable by law. Contracts may be written, oral, or implied by a person’s behaviour.

Contract for Sale

A contract used in the transfer of property, which sets out the conditions relating to the purchase/sale.

Credit Limit

The maximum preset amount a borrower can use on a loan account.

Credit Reference or Credit Report

Before approving a loan, most lenders will require a credit report on the borrower. Credit reports are prepared by authorised credit reporting agencies, such as the Credit Reference Association of Australia. The report sets out the credit history of the borrower. The Lender must get the borrower’s permission in writing before obtaining a credit report.

D

Daily Interest

Interest calculated on a daily basis.

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.

Debt Service Ratio

This is a measure of the borrower’s capacity to repay the loan. Lenders calculate the Debt Service Ratio by taking into account a borrower’s expenses as a proportion of their income.

Default

Failure to make a loan repayment by a specified date.

E

Early Repayment Penalty

If a loan is repaid before the end of its term, lenders may charge an early repayment fee.

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 a 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.

Equity

The amount of an asset that is owned.

Equity Participant

The owner participant, trustor owner, or grantor owner.

Equipment Schedule

A document that describes in detail the equipment being leased. It may also state the lease term, commencement date, repayment schedule and location of the equipment.

Exchange of contracts

An exchange of contracts commits the buyer to buy the property and the seller to sell the property. In some states, the law allows a cooling off period after the exchange of contracts, during which time either party can pull out. Borrowers should ask their solicitor or conveyancer whether the cooling-off period applies in their state.

F

Facility

This is another term used to describe your loan account.

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.

FID

(Financial Institutions Duty) State duty on payments made to financial institutions.

First Amendment Lease

The first amendment lease gives the lessee a purchase option at one or more defined points with a requirement that the lessee renew or continue 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 lessee appraisal and subject to a floor to insure that the lessor'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.

Finance Lease

Typically, a finance lease is a full-payout, noncancellable agreement, in which the lessee is responsible for maintenance, taxes, and insurance.

Fixed Interest Rate

You can choose to "lock in" your interest rate for a specific period, for example, for 2, 3, or 5 years. Lenders may charge a fee if you "break" this period, so it is important to ask the lender if any fees apply.

Full Payout Lease

A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.

G

Gearing

The ratio of your own loan amount to the value of your security.

Guarantee

A promise to meet the obligations of a third party if that third party defaults. Lenders in some circumstances may require a guarantee.

Guarantor

This is the person giving the guarantee. Most lenders will require the guarantor to get legal and financial advice before giving the guarantee.

Guideline Lease

A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.

Government or statutory charges

All home loans and purchase of residential property will attract certain government charges. For example, stamp duty, mortgage duty, taxes on deposits from bank account (called financial institutions duty) and taxes on withdrawals (called bank account debit tax). These charges vary from state to state, and are determined by the relevant state government, not the lender.

H

Hell-or-high Water Clause

A clause in a lease that reiterates the unconditional obligation of the lessee to pay rent for the entire term of the lease, regardless of any event affecting the equipment or any change in the circumstances of the lessee.

Honeymoon Rate

Some lenders offer a "discount" or introductory rate for a short period of time, say a year, to entice you to take out a loan with them. At the end of the "honeymoon" period, the interest rate normally reverts to the lender’s variable rate.

I

Indemnity Clause

A clause in which the lessee indemnifies the lessor from loss of tax benefits.

Indenture of Trust (Indenture)

An agreement between the owner trustee and the indenture trustee: The owner trustee mortgages the equipment and assigns the lease and rental payments under the lease as security for amounts due to the lenders. Same as a security agreement or mortgage.

Interest-Only Loan

Under an interest-only loan, usually the borrower makes no principal repayments. The repayments are for the amount of interest, which has accrued on the loan, which is paid monthly in arrears.

J

Joint and several liability

When two or more people take out a loan, most lenders require all the borrowers to be responsible for the loan if there is a default. This means that if one borrower defaults, the other borrowers are responsible for that person’s share of the loan. Another example, is where a wife and husband take out a loan jointly and then separate or divorce during the term of the loan — both remain responsible for paying off the loan, unless they have notified the lender and the lender has agreed in writing to change their loan agreement and mortgage.

L

Lease

A contract in which one party 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.

Lesee

The user of the equipment being leased.

Lessor

The party to a lease agreement 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.

Leveraged Lease

In this type of lease, the lessor provides an equity portion (usually 20 to 40 percent) of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax benefits of ownership.

Liabilities

Loans, debts, or obligations.

Line of Credit Loan

This is a flexible loan that allows you to have funds transferred to your cheque account when required. It is similar to an overdraft but is available at a much lower interest rate at Wizard.

Loan Agreement

The contract between the lender and the borrower, which sets out the conditions that apply to your loan. It is important that you read the agreement carefully, and wise to get legal and financial advice, before you enter into the loan.

Loan Security Duty

Government stamp duty charged to register your mortgage.

Loan to Value Ratio (LVR)

This is the measure of the amount of the loan compared to the value of the property. For example, if you have borrowed $160,000 and your property is valued at $200,000, the LVR would be 80%.

Lenders Mortgage Insurance

Lenders Mortgage Insurance is insurance taken out against the borrower to protect the lender against default. It is important to understand that lenders mortgage insurance does not provide you, the borrower, any form of protection. If the loan is in default, you may still be required to meet any shortfall between the amount owed to the lender and the amount received from the sale of your property. In most cases, the borrower pays the insurance premium.

Lump Sum Payment

An additional payment made by the borrower to reduce the loan amount. These payments are in addition to regular instalments.

M

Master Lease

A contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract.

Middle Market

A market segment generally represented by financing under $2 million and dominated by single investor leases.

Mortgage

Security over property given to the lender for the repayment of the loan.

Mortgagee

The lender of money, and the party who has the benefit of the mortgage over your property.

Mortgagor

The borrower.

Mortgage Duty

A government tax which is payable by the borrower on the borrower’s mortgage. The amount of the duty varies from state to state and in some states, mortgage duty may not be payable when the loan is refinanced.

N

Net Lease

A lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.

Nonrecourse Loan

In a leveraged lease, the lenders cannot look to the lessor for repayment. The lender's only recourse is to the lessee and, therefore, the lessee's credit rating is of prime importance.

O

Old System Title

(common law title) consists of a ‘chain’ listing all owners of a property since origin.

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 just a fraction of the useful life of the asset. Additional services such as maintenance and insurance may be provided by the lessor.

P

Packager

The leasing company, investment banker, or broker who arranges a leveraged lease.

Power of attorney

A formal appointment where a person appoints another (called the attorney) to act as their legal representative.

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.

Principal

The amount outstanding on your loan. You pay the lender the interest on the principal.

Principal & Interest Loan

This is the most popular type of loan where you repay a portion of the principal and the accrued interest over the term of the loan by regular instalments.

Private Sale

Sale of a property without the involvement of an estate agent.

Private Treaty Sale

A property sale where the buyer negotiates on a price set by the seller, rather than through the auction process.

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.

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.

R

Redraw Facility

If you have made any Lump Sum Repayments to your loan account, you can access those extra repayments whilst on a variable rate.

Refinancing

This means that you switch your loan from one lender to another.

Reserve Price

Preset minimum acceptable price of seller at auction.

Residual Value

The value of an asset at the conclusion of a lease.

S

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.

Sales-Type Lease

A lease by a lessor who is the manufacturer or dealer, in which the lease meets the definitional criteria of a capital lease or direct financing lease.

Search

An enquiry to confirm that a property vendor is in a position to sell a property, also detailing any encumbrances listed against the property.

Security

An asset used to guarantee a loan.

Settlement

Is the completion of the sale or purchase of a property. When the final payments are made at settlement, the lender will receive the signed transfer and the mortgage. The lender will hold the title deeds and the mortgage until the loan is repaid. The keys to the property are either handed over at settlement, or picked up from the estate agent immediately following settlement.

Settlement Date

Specific date at which buyer is to take possession of property upon finalising payment.

Single Investor 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 ofthe 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.

Small-ticker Leasing

Transactions under $100,000, typically using conditional sale leases or single investor true leases.

Signatory

Person authorised to access an account.

Stamp Duty

Stamp duty is a state government tax which is payable when a property is sold. Stamp duty is calculated on the purchase price of the property and is paid by the buyer. Each state and territory has a different rate of duty.

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.

Strata Title

Title that grants ownership of a section or a ‘unit’ of a larger building. This ‘unit’ can be sold or transferred by the owner.

Survey

Plan that details a block of land noting the position of any buildings.

Synthetic Lease

A synthetic lease is basically a financing structured to be treated as a lease for accounting purposes, but as a loan for tax purposes. The structure is used by corporations that are seeking off-balance sheet reporting of their asset based financing, and that can efficiently use the tax benefits of owning the financed asset.

T

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.

Term

The length of a loan or a defined period within that loan.

Torrens Title:

Title that grants ownership of a piece of property. Also known as Certificate of Title.

Transfer

A document registered with the Land Titles Office noting the change of ownership.

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 payments 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.

V

Valuation

A professional opinion of the value of a property.

Variable Interest Rate

This is a fluctuating rate of interest charged by lenders. Variable interest rates change as official market interest rates rise and fall.

Vendor

The seller of a property.

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 of credit checking, and performance of collections and operational administration. Also known as lease asset servicing or vendor program.

Z

Zoning

Local authority guidelines as to the permitted uses of land and buildings.