Leasing Companies Industry Terminology
ALM (Asset-Liability Management)
A risk management discipline that matches the maturities, interest-rate sensitivity, and liquidity profile of lease receivables and residual exposures with the funding stack to stabilize margin and cash flow. Examples: Our ALM committee shortened liability duration to align with our three-year equipment leases | We used swaps as part of ALM to fix SOFR exposure on floating-rate leases | ALM limits cap our interest-rate gap to six months
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ASC 842
U.S. GAAP leasing standard requiring lessees to recognize right‑of‑use (ROU) assets and lease liabilities, and prescribing lessor models (operating, sales-type, direct financing). It includes five classification tests for lessees (transfer of ownership, BPO, major part of economic life, PV substantially all, specialized asset). Examples: The new copier contract triggers a finance lease under ASC 842 | We booked a sales-type lease per ASC 842 due to a selling profit | Our auditors reviewed the ASC 842 discount rate selection
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Bargain Purchase Option (BPO)
A purchase option priced so favorably at commencement that it is reasonably certain the lessee will exercise; for lessees it triggers finance-lease classification under ASC 842. Examples: The $1 buyout qualifies as a BPO | Because of the BPO, we used the asset’s economic life for amortization | The presence of a BPO changes our residual risk to near zero
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Captive Finance Company
A financing subsidiary owned by a manufacturer or OEM to fund leases and loans on its products, often with preferential pricing and embedded distribution. Examples: The OEM’s captive offered a subvented FMV lease | We set up a vendor program through the captive finance arm | The captive’s remarketing strength lowers residual risk
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CECL (Current Expected Credit Loss)
U.S. GAAP lifetime expected credit loss model that requires forward‑looking reserve estimates for lease receivables and related assets at origination and over time. Examples: We increased our CECL allowance due to macroeconomic deterioration | CECL scenarios reflect higher default risk in construction equipment | The CECL model uses PD/LGD on our small-ticket portfolio
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Collateral
Assets pledged to secure obligations. In a true lease the lessor owns the asset; in a secured loan or lease-for-security, the asset serves as collateral via a perfected security interest. Examples: We filed a UCC-1 to perfect our interest in the collateral | The asset is the primary collateral with a corporate guarantee as secondary support | A lien search confirmed no prior claims on the collateral
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Cross-Default Clause
A covenant that triggers default on one lease or facility if the lessee defaults on another specified obligation, strengthening creditor protections across agreements. Examples: The cross-default tied the new schedule to the master lease | We negotiated a higher threshold for cross-default to avoid technical breaches | The bank required cross-default across our ABS warehouse lines
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Debt Service Coverage Ratio (DSCR)
A key credit metric: cash available for debt service divided by debt service. Underwriters use DSCR to assess lessee capacity to meet lease payments. Examples: We require a minimum 1.25x DSCR for middle-market deals | Weak DSCR pushed us to require additional collateral | Rising rates compressed DSCR in our floating-rate leases
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Direct Financing Lease
Lessor classification under ASC 842 when the PV of lease payments plus any GRV substantially equals the asset’s carrying amount and there is no selling profit; the lessor recognizes a net investment and interest income over the term. Examples: The deal qualified as a direct financing lease with no day‑one profit | We recorded NIL and recognized accretion income monthly | GRV from a third party helped achieve direct-finance treatment
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Discount Rate
The rate used to present value lease payments. Lessees use the implicit rate if readily determinable; otherwise the incremental borrowing rate. Lessors typically use the implicit rate. Examples: We applied the implicit rate because the residual and fees were known | The IBR was derived from our unsecured curve plus a spread | A lower discount rate increased the PV and tipped the classification
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Early Buyout Option (EBO)
A provision allowing the lessee to purchase the asset before maturity at a specified date and price. Common in TRAC and fleet leases and affects cash flow and residual assumptions. Examples: The client exercised the EBO in month 36 | Pricing reflects EBO risk via a higher margin | Our model assumes 20 percent EBO take‑up in year three
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Economic Life
The period over which an asset is expected to be economically usable. For classification under ASC 842, a lease covering the major part of the economic life is a finance lease. Examples: We set economic life at seven years for the press | The 72‑month term is the major part of economic life | Residuals depend on assumed economic life curves
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End-of-Term Options
Lessee choices at lease expiry, typically return, renew, or purchase (FMV or fixed). These options drive residual risk, pricing, and classification. Examples: The lease offers FMV purchase, renewal at 90 percent of market, or return | We priced renewal probability at 30 percent | Return conditions apply if no end‑of‑term election is made
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Fair Market Value (FMV) Lease
A lease with a purchase option at fair market value; often classified as operating for lessees and places residual risk on the lessor. Examples: We structured an FMV lease to keep payments low | FMV purchase preserves off‑balance‑sheet treatment under IFRS for lessors | FMV exposure requires strong remarketing
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Finance Lease
Lessee classification under ASC 842 when any of the five criteria are met (e.g., BPO, ownership transfer, major part of economic life). Recognized with separate interest expense and amortization. Examples: The presence of a BPO made it a finance lease | We booked both interest expense and ROU amortization | The PV test pushed it into finance-lease territory
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Floating Rate Lease
A lease with payments indexed to a benchmark (e.g., SOFR, CPI). Lessees measure the liability using the index level at commencement; subsequent changes in index affect period expense, not the liability balance. Examples: The rent resets quarterly to 3‑month Term SOFR plus 250 bps | CPI‑linked variable payments hit P&L as incurred | We hedged floating exposure with a pay‑fixed swap
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Guaranteed Residual Value (GRV)
A third‑party or lessee guarantee of the asset’s residual value to the lessor at end of term, reducing residual risk and affecting classification and measurement. Examples: The OEM provided a GRV of 25 percent of cost | GRV moved the lessor classification to direct financing | The lessee’s GRV lowered lease pricing by 50 bps
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IFRS 16
IFRS leasing standard under which lessees recognize a single on‑balance‑sheet lease model; lessor accounting remains similar to IAS 17 (operating vs finance). Examples: Under IFRS 16 the lessee recognized a right‑of‑use asset | Lessor kept operating‑lease treatment under IFRS 16 | We aligned US GAAP and IFRS 16 disclosures for comparability
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Implicit Rate in the Lease
The discount rate that equates the PV of lease payments and any residual guaranteed by the lessee to the fair value of the underlying asset plus initial direct costs. Examples: The implicit rate was determinable from the vendor invoice and GRV | Using the implicit rate avoided an overstated liability | Our ERP calculates the implicit rate when data are available
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Incremental Borrowing Rate (IBR)
The rate a lessee would pay to borrow, over a similar term and with similar security, the funds necessary to obtain a similar asset. Used when the implicit rate is not readily determinable. Examples: Treasury plus 200 bps produced a 6.2 percent IBR | We set separate IBR curves by country and tenor | A higher IBR reduced the recognized ROU asset
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Initial Direct Costs (IDC)
Incremental costs that would not have been incurred if the lease had not been obtained (e.g., broker fees). Capitalized differently depending on lease type (lessor) or added to the ROU asset (lessee). Examples: We capitalized the placement fee as IDC | Sales bonuses not directly tied to a lease were excluded from IDC | IDC amortizes over the lease term
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KYC (Know Your Customer)
Customer due‑diligence and identity verification required for AML and sanctions compliance in lease origination and funding. Examples: KYC flagged a sanctioned shareholder in the applicant | We refreshed KYC at renewal per policy | The funding partner required KYC files before purchase
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Lease Classification Tests
ASC 842 lessee criteria determining finance vs operating: ownership transfer, BPO, major part of economic life, PV substantially all of fair value, or specialized asset. Lessors use separate models (operating, sales-type, direct financing). Examples: The PV test exceeded the substantially‑all threshold | Specialized asset failed the alternative‑use test | No criteria met, so it remained an operating lease
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Lease Rate Factor (LRF)
A quick pricing metric equal to periodic payment divided by equipment cost; often expressed per month (e.g., 0.028 means 2.8 percent of cost per month). Examples: At a 0.022 LRF the payment is 2.2 percent of cost monthly | LRF rose due to higher base rates | We quoted both LRF and APR for transparency
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Lien
A legal claim on property to secure payment. Lessors or lenders rely on liens to protect recovery if a lessee defaults. Examples: A prior lien required us to obtain a subordination | The lien perfected upon UCC filing | We verified lien releases before remarketing
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MACRS Depreciation
U.S. tax depreciation system (Modified Accelerated Cost Recovery System) that allows accelerated deductions to the tax owner, often the lessor in a tax lease. Examples: MACRS benefits let us price the lease more aggressively | The lessor retains MACRS in a true tax lease | Bonus depreciation changed our after‑tax yield
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Material Adverse Change (MAC) Clause
A covenant allowing the lessor or lender to declare default or refuse funding upon a materially negative change in the lessee’s condition. Examples: The MAC clause was narrowed to objective triggers | A ratings downgrade could trip the MAC | We carved out industry‑wide events from the MAC
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Master Lease Agreement (MLA)
Framework contract governing multiple equipment schedules over time, standardizing terms, covenants, and remedies while allowing quick takedowns. Examples: We executed an MLA with quarterly schedules | Cross‑default applies across all MLA schedules | The MLA simplified documentation and pricing
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Net Investment in Lease (NIL)
For lessors, the present value of lease payments plus the present value of any unguaranteed residual, minus unearned income. Recognized on the balance sheet for sales-type and direct financing leases. Examples: NIL accretes over time as interest income | Impairment testing is performed on the NIL | A lower URV reduced the initial NIL
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Operating Lease
A lease that does not transfer substantially all risks and rewards of ownership. Lessee recognizes straight‑line lease expense; lessor keeps the asset on balance sheet and recognizes lease income over time. Examples: The FMV copier lease is operating for the lessee | We, as lessor, recognized rental income and kept the asset on books | Operating treatment preserved residual upside
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Pay-Per-Use (Usage-Based) Leasing
Pricing model where payments vary with usage metrics (hours, miles, output), enabled by telemetry/IoT; often leads to variable lease payments recognized as incurred. Examples: The compressor lease bills per operating hour | Usage‑based rent shifted volume risk to the lessor | We integrated IoT meters to enable pay‑per‑use billing
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Perfection of Security Interest
Legal steps to establish priority over collateral (e.g., UCC‑1 filing, possession, or control), protecting the lessor or lender against other claimants. Examples: We perfected via UCC‑1 in the debtor’s state | Possession perfected our interest in negotiable assets | A filing lapse jeopardized perfection and priority
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Present Value of Lease Payments
The discounted sum of fixed payments, in‑substance fixed payments, GRV amounts owed by the lessee, and certain fees; used for classification and measurement under ASC 842. Examples: The PV exceeded substantially all of fair value | We recalculated PV at commencement for index‑linked payments | PV drives the initial ROU asset and liability
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Purchase Option
A lessee’s right to buy the asset during or at the end of the lease, at FMV or a fixed price; if reasonably certain, it affects term and classification. Examples: The fixed‑price purchase option extended the lease term for accounting | FMV purchase leaves residual risk with the lessor | We modeled a 40 percent take‑rate on the purchase option
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Recourse vs Non-Recourse
Funding or assignment structures where the buyer/lender either has recourse to the originator for credit losses (recourse) or relies solely on the assets (non‑recourse). Examples: We sold leases non‑recourse into the ABS trust | The warehouse is partial‑recourse up to a first‑loss piece | Vendor recourse improved advance rates
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Residual Value
Estimated asset value at lease end; a core driver of pricing, risk, and lessor returns. Can be guaranteed (GRV) or unguaranteed (URV). Examples: We set a 30 percent residual on the fleet cars | Residual impairment hit earnings due to soft secondary markets | Residual sharing aligned incentives with the vendor
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Return Conditions
Contractual standards for asset redelivery (wear and tear, hours/miles caps, maintenance status), protecting residual value at end of term. Examples: The aircraft must meet redelivery return conditions on cycles and LLPs | Excess wear and tear fees applied at inspection | Missing maintenance records can breach return conditions
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Sale-Leaseback
A transaction where the seller transfers an asset and immediately leases it back. If the transfer qualifies as a sale under ASC 606/842, the lessee recognizes an ROU asset; otherwise it is a financing. Examples: The building sale‑leaseback unlocked liquidity | The transfer failed sale accounting, so we booked a financing | We sized rent to hit target proceeds and coverage
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Securitization
Pooling leases and related receivables into an SPV that issues asset‑backed securities (ABS), often with credit enhancement and tranched capital. Examples: We securitized $500 million of small‑ticket leases | Overcollateralization and a reserve account provided enhancement | The ABS deal lowered our funding cost by 120 bps
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Servicing
Operational management of a lease portfolio: billing, collections, asset tracking, customer service, workouts, and remarketing. Examples: We retained servicing on the sold portfolio | Strong servicing reduced delinquencies in COVID‑affected sectors | Servicing advances were reimbursable from the trust
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SOFR (Secured Overnight Financing Rate)
The primary USD interest-rate benchmark replacing LIBOR, observed in overnight repo markets; can be used as Daily Simple or Term SOFR in leases. Examples: Our floating leases price off 1‑month Term SOFR | The LIBOR fallback converted to SOFR plus a fixed spread | We hedged SOFR exposure with a pay‑fixed OIS swap
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Special Purpose Vehicle (SPV)
A bankruptcy‑remote entity used to hold leases and issue ABS or to isolate asset risk. Often features independent directors and separateness covenants. Examples: The leases were sold true sale to the SPV | SPV covenants restrict commingling and guarantees | Investors required two independent managers for the SPV
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Sublease
A lease granted by a lessee to a sublessee for the same underlying asset; classification is assessed separately from the head lease. Examples: The tenant subleased unused space to cut costs | We classified the sublease as operating | Head‑lease obligations remain even with a sublease
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Tax Lease
A structure in which the lessor is the tax owner and claims tax depreciation (e.g., MACRS), often allowing lower rent to the lessee. Examples: The tax lease passed MACRS benefits to the lessee via pricing | We confirmed tax ownership to support deductions | Tax reform shifted our preferred mix toward tax leases
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Term Sheet
A nonbinding summary of key economic and legal terms for a proposed lease, used to align parties before documentation. Examples: The term sheet outlined tenor, LRF, GRV, and covenants | Credit approved the deal per the term sheet | We added an EBO provision in the revised term sheet
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True Lease
A lease that is a lease in substance for legal and tax purposes (as opposed to a disguised secured loan), with meaningful residual risk retained by the lessor. Examples: Return provisions and FMV option support true‑lease status | Counsel opined the structure is a true lease under Article 2A | True‑lease status enabled sales‑tax advantages
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UCC-1 Financing Statement
A public filing under the Uniform Commercial Code to perfect a security interest in personal property collateral, establishing priority. Examples: We filed a UCC‑1 naming the debtor’s exact legal name | Lapse in the UCC‑1 would subordinate our interest | The UCC‑1 covered equipment and proceeds
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Underwriting
The end‑to‑end credit, collateral, and residual analysis to decide whether and how to structure, price, and approve a lease. Examples: Underwriting required two years of audited financials and appraisals | Weak DSCR led to shorter tenor and higher GRV | We tightened underwriting standards in cyclical sectors
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Unguaranteed Residual Value (URV)
The portion of expected residual value not guaranteed by the lessee or a third party; borne as risk by the lessor and included in NIL measurement. Examples: We assumed a 15 percent URV on forklifts | Higher URV means more remarketing risk but lower rent | URV impairment hit the quarter due to weak resale prices
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Variable Lease Payments
Payments that vary with an index or rate (included in the lease liability based on the index at commencement) or depend on usage/performance (generally excluded from the liability and expensed as incurred). Examples: CPI‑based increases are remeasured only when the lease is modified under ASC 842 | Over‑miles charges are variable and recognized in‑period | We modeled volatility from index‑linked rent escalations
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