Leasing Glossary. Other Sources

Transcription

1 Leasing Glossary Given the specialized nature of the Personal Property Security Act, terminology relating to the PPSA has been set out in a separate PPSA Leasing Glossary. PLEASE NOTE: This document has been designed and compiled as a practical resource to assist those active in the asset-based financing, equipment and vehicle leasing industry in Canada. It does not purport to provide a comprehensive or definitive version of terms and language commonly used in the industry. The CFLA welcomes the suggestion of additional terms or definitions of common use in the business of asset-based financing, equipment and vehicle leasing in Canada. The terms included in the CFLA Leasing Glossary are drawn from the documentation presented by Associate Members at the following CFLA Professional Development Seminars: Accounting & Tax Fundamentals for Leasing KPMG LLP Basic GST & PST for Leasing PricewaterhouseCoopers LLP Insurance Fundamentals for Leasing Hunter, Keilty Muntz & Beatty Legal Principles for Leasing Blake, Cassels & Graydon LLP PPSA Understanding Lease Registration Jones McCloy Peterson PPSA Understanding Lease Registration Lafleur Brown/Gowling Lafleur Henderson LLP (Montréal) Definitions are also taken from Leasing in Canada (Third Edition) by Ralph Selby, FCA, of PricewaterhouseCoopers LLP and the Secretary Treasurer of CFLA, published by Butterworths Canada Limited in Additional definitions come from various publications of the U.S. Equipment Leasing Association and from Turning the Lights on Leasing, a Consumer Guide to Vehicle Leasing, a joint publication of CFLA, the Association of International Automobile Manufacturers of Canada, the Canadian Automobile Dealers Association and the Canadian Vehicle Manufacturers Association. CFLA thanks the following Associate Members for their contribution to a better and more professional understanding of the business of asset-based financing, equipment and vehicle leasing: Other Sources Blake, Cassels & Graydon LLP Toronto & Vancouver Gowling Lafleur Henderson LLP Montreal Hunter Keilty Muntz & Beatty Toronto & Vancouver Jones McCloy Peterson Vancouver KPMG LLP Montreal, Toronto & Vancouver Lafleur Brown Toronto PricewaterhouseCoopers LLP Montreal, Toronto & Vancouver With special thanks to: Butterworths Canada Limited Equipment Leasing Association of America Ralph Selby, FCA Glossary of Frequently Used Terms, Department of Finance Canada Glossaire de termes courants, ministère des Finances Canada APR See Annual Percentage Rate

2 2 ASSET-BASED FINANCING The financing of equipment and vehicles and of related items or services, primarily by way of lease, but also by secured loan or conditional sales contract. (CFLA) ASSET SCHEDULE A document that describes in detail the asset being leased. It may also state the lease term, commencement date, repayment schedule and location of the asset. (U.S. Equipment Leasing Association) ANNUAL PERCENTAGE RATE The total carrying cost paid by a consumer lessee over the term of a consumer lease expressed as an annual rate. For the purposes of statutory consumer cost of credit disclosure requirements, the APR is intended to be similar to the cost of borrowing charges on a consumer loan. (Turning the Lights on Leasing, a Consumer Guide to Vehicle Leasing) BALLOON PAYMENTS Larger than normal payments, usually occurring at the end of the lease term (sometimes called a "bullet"). (Leasing in Canada [Third Editioon], Ralph Selby FCA, Butterworths, 1999 BARGAIN PURCHASE OPTION [see also Bargain Renewal Option, Fair Market Purchase Option, Fixed Purchase Option, and Purchase Option] A provision allowing the lessee, at its option, to purchase the leased property for a price which is substantially lower than the expected fair value of the property at the date the option becomes exercisable. (KPMG LLP) 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. (US Equipment Leasing Association) An option given to the lessee to purchase the leased property at a price that is less than the expected fair market value so that, at the inception of the lease, it is reasonable to assume that the lessee will if acting rationally exercise the option to purchase. (Blake, Cassels & Graydon LLP) BIG-TICKET A market segment generally represented by lease financings over $1 million (over US$2 million in the United States - U.S. Equipment Leasing Association) BROKER A company or person who arranges, for a fee, transactions between lessees and lessors of an asset. (U.S. Equipment Leasing Association) CCA See Capital Cost Allowance CCA RECAPTURE See Capital Cost Allowance Recapture CICA HANDBOOK Authoritative handbook containing the current pronouncements of the Canadian Institute of Chartered Accountants (CICA) on specific accounting and auditing issues. See also Generally Accepted

3 3 Accounting Principles. CAPITAL COST ALLOWANCE (CCA) Capital Cost allowance (the annual amount which a taxpayer may deduct in computing taxable income). (Leasing in Canada [Third Edition], Ralph Selby, FCA, CAPITAL COST ALLOWANCE RECAPTURE The excess of the sale price of a leased asset over the asset s remaining undepreciated capital cost (UCC). If the sale price is less than original cost, this amount is subject to tax in full. (Leasing in Canada [Third Edition], Ralph Selby, FCA, CAPITAL LEASE [See Finance Lease; compare Operating Lease] An accounting term meaning a lease which transfers substantially all of the risks and benefits of ownership of the leased property to the lessee. The criteria set out in the Canadian Institute of Chartered Accountants handbook provide that a lease will be treated as a capital lease if it meets any of the following criteria: title passes automatically at the end of the lease term; the lease contains a bargain purchase option (i.e. less than fair market value) the lease term is greater than 75% of the estimated economic life of the leased property; or the present value of the minimum lease payments is greater than 90% of the leased property s fair market value at the inception of the lease. (Blake, Cassels & Graydon LLP) A lease that transfers substantially all of the benefits and risks incident to ownership of the property to the lessee. (KPMG LLP) CAPITAL TAX Tax based on a firm s taxable capital; tax rate varies among provinces (see also federal Large Corporation Tax) (Leasing in Canada [Third Edition], Ralph Selby, FCA, CAPTIVE A frequently-heard industry term used to describe the sales finance division or subsidiary of a manufacturer. The primary role of the captive is to provide financing to support customers in acquiring the manufacturer s products. CASH-FLOW-BASED CREDIT ANALYSIS Cash-flow-based credit analysis is a primary financial innovation of asset-based financing industry. Because a leasing company retains ownership of the leased equipment or vehicle, at least until the end of the lease, it enables a lessee to qualify for use of the asset leased based on its generated cash flow rather than the lessee s credit history, assets or capital base. (CFLA) CERTIFICATE OF ACCEPTANCE (Delivery and A document whereby the lessee acknowledges that the equipment to be lease has been delivered, is acceptable, and has been

4 4 Acceptance) manufactured or constructed according to specifications. (U.S. Equipment Leasing Association) CLOSED-END LEASE [Compare to Open-end Lease] Used generally in vehicle leasing, in a Closed -End Lease, a lessee makes a set number of lease payments during the term of the lease and returns the vehicle to the lessor at the end of the lease term. The lessee is not required to make any additional payments unless there is physical damage to the vehicle, such as excess wear and tear, or the number of kilometres driven by the lessee is higher than the kilometre limit set out in the lease. [See also Wear and Tear]. (Turning the Lights on Leasing - Consumer Guide to Vehicle Leasing) A lease where at the end of the lease term, the lessee is not obligated to make any adjustment payments to account for the residual value of the leased property.(blake Cassels & Graydon LLP) CONDITIONAL SALE [see also Installment Sale] A conditional sale occurs when possession of property is transferred, but ownership passes only after the sale meets certain conditions, such as full payment of the purchase price. A conditional sale is not a lease. (PricewaterhouseCoopers LLP) CONDITIONAL SALE CONTRACT (CSC) A sale agreement for goods by which possession of property is transferred, but ownership passes only after the sale meets certain conditions, such as full payment of the purchase price. A conditional sale is not a lease. (Leasing in Canada [Third Edition], Ralph Selby, FCA, CONSUMER "Consumer means a natural person who is offered, acquires or uses a good or service primarily for personal, family or household purposes;" Article 810 of the federal-provincial Agreement on Internal Trade (AIT). CONTINGENT RENTAL Rental based on a factor other than the passage of time. (KPMG LLP) DIRECT FINANCING LEASE A capital lease where, at the inception of the lease, the fair value of the leased property is the same as its carrying amount to the lessor. (KPMG LLP) Capital leases which provide the lessor with financing income; the lessor is essentially a financial intermediary. (Leasing in Canada [Third Edition], Ralph Selby, FCA, 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. (U.S. Equipment Leasing Association) ECONOMIC LIFE Estimated remaining period during which the property is expected to be economically usable by one or more users, with normal

5 5 repairs and maintenance. (KPMG LLP) The period during which an asset is expected to have economic value to one or more users. (Leasing in Canada [Third Edition], Ralph Selby, FCA, The period of time during which an asset will have economic value and be usable. (U.S. Equipment Leasing Association) 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. (U.S. Equipment Leasing Association) EQUITY PARTICIPANT The owner participant, trustor owner, or grantor owner. (U.S. Equipment Leasing Association) EXECUTORY COSTS The costs related to the operation of the leased property (insurance, property taxes, maintenance) paid to the lessor. (KPMG LLP) Costs related to the operation of the leased property (e.g. insurance, maintenance cost, and property taxes). (Leasing in Canada [Third Edition], Ralph Selby, FCA, EXEMPT PROPERTY There are assets that are exempt property from the April 1989 tax changes and include much office furniture and equipment, computers costing less than $1 million, furniture and equipment for residential use, automobiles, vans or trucks, most buildings and railway cars. (Leasing in Canada [Third Edition], Ralph Selby, FCA, FAIR MARKET PURCHASE OPTION [see also Bargain Purchase Option, Bargain Renew-al Option, Fixed Purchase Option, and Purchase Option] An option to purchase leased property at the end of the lease term at its then fair market value. The lessor cannot retain title to the equipment if the lessee chooses to exercise the purchase option. (U.S. Equipment Leasing Association) FAIR MARKET VALUE The amount that a "reasonable person" would pay in a competitive market. (Leasing in Canada [Third Edition], Ralph Selby, FCA, FAIR VALUE OF THE PROPERTY The price for which the leased property could be sold in an arms s length transaction (usually normal the selling price if manufacturer or dealer or the cost to the lessor). (KPMG LLP) FINANCE LEASE [See Capital Lease; compare Operating Lease] Typically, a finance lease is a full-payout, noncancellable agreement, in which the lessee is responsible for maintenance, taxes, and insurance. (U.S. Equipment Leasing Association)

6 6 FIXED PURCHASE OPTION [see also Bargain Purchase Op-tion, Bargain Renewal Option, Fair Market Purchase Option, and Purchase Option] An option given to the lessee to purchase the leased property form the lessor on the option date for a guaranteed price, determined at the inception at the lease. (Blakes Cassels & Graydon LLP) FULL PAYOUT LEASE A lease in which the total of the lease payments pays back to the lessor the entire cost of the leased property including financing, overhead and a reasonable rate of return, with little or no dependence on a residual value. (Blakes Cassels & Graydon LLP) Lease which provides for recovery of the full cost of an asset to the lessor over the lease term plus a return to the lessor, by way of rent plus guaranteed residual. (Leasing in Canada [Third Edition], Ralph Selby, FCA, A lease in which the lessor recovers, though the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased asset s future residual value. (U.S. Equipment Leasing Association) GAAP See Generally Accepted Accounting Principles GOODS & SERVICES TAX (GST) A national value-added tax imposed on taxable supply of goods and services provided in Canada. Supply is defined to include sale, transfer, barter, exchange, licence, rental, lease,gift or disposition. (PricewaterhouseCoopers LLP) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) Accounting practices which have been codified in the (Canadian Institute of Chartered Accountants) CICA Handbook, or which are in common usage. (Leasing in Canada [Third Edition], Ralph Selby, FCA, HELL-OR-HIGH-WATER CLAUSE These contractual provisions essentially require that the lessee perform its obligations under the lease without right of setoff, deduction, abatement, compensation or counter-claim for any reason whatsoever. For the lessor, the purpose is to ensure that it will invariably receive its monthly rental payment. Gowling Lafleur Henderson LLP, Montréal. [See also: "Hell or High Water" Clauses in Equipment Leases ~ their enforceability in Québec", by David B. Kierans, Partner, Business Law Group, Gowling Lafleur Henderson LLP, Montréal, March 2001, at: 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 asset or any change in the circumstances or the lessee. (U.S. Equipment Leasing Association) IMPLICIT INTEREST RATE See Interest Rate Implicit in the Lease INDENTURE OF TRUST An agreement between the owner trustee and the indenture

7 7 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 security agreement or mortgage. (U.S. Equipment Leasing Association) INSURANCE Insurance means the undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance is exposed, or to pay a sum of money or other thing of value upon the happening of a certain event. (Ontario Insurance Act) A contractual agreement between an insurance company and an insured where the company promises to pay for losses from property damage or bodily injury caused by a covered peril. The insured promises to pay to the insurance company in return for coverage. You can only insure against future accidental events. The main principle of insurance is that the insured is indemnified by the insurance company after a loss. This means that the insured is paid no more and no less than the amount of the loss. The insurance policy is the written evidence of the contract and thus contains the terms and conditions of the contract. (Hunter Keilty Muntz & Beatty) INSURANCE PREMIUMS Premium means the single or periodical payment under a contract of insurance and includes dues, assessments, administration fees paid for the administration or servicing of such contract, and other considerations. (Ontario Insurance Act) Premiums are determined by applying the law of averages and the theory of probability to past experience. (Hunter Keilty Muntz & Beatty) INSURANCE RISK Risk means a chance of loss. Speculative Risk - exists when there is a chance of loss and also a chance for profit i.e. gambling at a casino - these risks cannot be insured against. Pure Risk - exists when there is a chance of loss but no chance of profit i.e..: driving an asset- these risks can be insured against. Broadly, there are three choices: (1) Eliminate the risk: implement preventive measures to reduce risk i.e..: fire alarms, sprinklers, seat belts. (2) Assume the risk: bear the cost of losses as they occur or set aside an amount of money periodically in order to self insure against losses. (3) Transfer the risk: transfer the risk to someone whose financial capability to handle a loss is greater than your own. This risk transfer comes at a price and is called insurance. (Hunter Keilty

8 8 Muntz & Beatty) INITIAL DIRECT COSTS The costs incurred by a lessor directly associated with negotiating and executing a specific leasing transaction (i.e., commissions, legal, documentation). (KPMG LLP) INTEREST RATE IMPLICIT IN THE LEASE The discount rate that, at the inception of the lease, causes the aggregate present value of (a) the lessor s minimum lease payments excluding executory costs; and (b) the unguaranteed value accruing to the benefit of the lessor to be equal to the fair value of the property at the inception of the lease. (KPMG LLP) INTERNAL RATE OF RETURN The rate of return on an investment, calculated by finding the discount rate which equals the present value of future cash flows to the initial cost of the investment. (Leasing in Canada [Third Edition], Ralph Selby, FCA, INSTALLMENT SALE [See Conditional Sale] An installment sale occurs when a vendor transfers ownership and possession to the purchaser immediately. The purchaser agrees to make payments over a period of time. An installment sale is not a lease. (PricewaterhouseCoopers LLP) LCT See Large Corporation Tax LARGE CORPORATION TAX Large Corporation Tax, a federal tax imposed on corporations with capital over $10 million. (Leasing in Canada [Third Edition], Ralph Selby, FCA, 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. (U.S. Equipment Leasing Association) LEASE TERM The lease term is the fixed non-cancellable term of the lease plus: all periods covered by bargain renewal options; all periods for which failure to renew would impose on the lessee a penalty sufficiently large that renewal appears reasonably assured; all periods covered by ordinary renewal options where the lessee has undertaken to guarantee the lessor s debt related to the leased property; all periods covered by ordinary renewal options preceding the date on which a bargain purchase option is exercisable; and all periods representing renewals or extensions of the lease at the lessor s option. (KPMG LLP) LEASE RATE (Rental Payment) The periodic rental payment to a lessor for the use of assets. Or the lease rate as the implicit interest rate in minimum lease

9 9 payments. (U.S. Equipment Leasing Association) LESSEE The party who is obligated to pay rental to the lessor in exchange for use and possession of the leased property. (Blake Cassels & Graydon LLP) The party who obtains the use of an asset through a lease agreement. (Leasing in Canada [Third Edition], Ralph Selby, FCA, The user of the equipment being leased. (U.S. Equipment Leasing Association) LESSEE S INCREMENTAL BORROWING RATE The interest rate that, at the inception of the lease, the lessee would have incurred to borrow (using similar terms) to purchase the leased asset. (KPMG LLP) LESSOR The party who has legal title to the leased property and grants the lessee the right to use and possess the leased property in exchange for a rental amount. (Blake Cassels & Graydon LLP) The party who owns the leased asset. (Leasing in Canada [Third Edition], Ralph Selby, FCA, 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. (U.S. Equipment Leasing Association) 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. (U.S. Equipment Leasing Association) MIDDLE MARKET (or Mid- Ticket) A market segment generally represented by financings over $100,000 but under $1 million. (Over US$100,000 but under US$2 million in the United States - U.S. Equipment Leasing Association) MINIMUM LEASE PAYMENTS Lessee: The minimum rental payments called for by the lease over the lease term; plus any guarantee by the lessee of the residual value of the leased property at the end of the lease term; and any penalty required to be paid by the lessee for failure to renew or extend the lease at the end of the lease term. If a bargain purchase option exists, then only the minimum rental payments and the bargain purchase option are included in the lease payments.

10 10 Lessor: The minimum lease payments for the lessee as described above and any residual value or rental payments beyond the lease term guaranteed by a third party unrelated to the lessee or lessor. (KPMG LLP) NET LEASE A lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee. (U.S. Equipment Leasing Association) NET PRESENT VALUE The sum of a series of future cash flows, discounted at an appropriate rate to a current value. (Leasing in Canada [Third Edition], Ralph Selby, FCA, NONRECOURSE LOAN In a leveraged lease, the lenders cannot look at the lessor for repayment. The lender s only recourse is to the lessee and, therefore, the lessee s credit rating is of prime importance. (U.S. Equipment Leasing Association) OPEN-END LEASE [Compare Closed-end Lease] Used generally in vehicle leasing, in an Open-End Lease, a lessee makes a set number of payments during the term of the lease and returns the vehicle to the lessor at the end of the lease term. Then an adjustment is made. The lessee is required to make an additional payment covering the difference between the actual value of the vehicle at the end of the lease and the residual value stated on the lease contract. If, however, the actual value of the vehicle is more than the residual value stated in the lease, the lessee is entitled to the difference. [See also Residual Value]. (Turning the Lights on Leasing - Consumer Guide to Vehicle Leasing) A lease where at the end of the lease term, the lessee is required to make an adjustment payment covering the difference between the actual value of the leased property at the end of the lease and the residual value stated on the lease contract. If the actual value of the leased property is greater than the residual value stated on the lease, then the lessee is entitled to the difference. (Blake Cassels & Graydon LLP) A lease where a lessee guarantees that the lessor will realize a minimum value from the sale of the asset at the end of the lease. (U.S. Equipment Leasing Association) OPERATING LEASE [Compare to Capital or Finance Lease] A lease which does not transfer substantially all the benefits and risks incident to ownership of property. (KPMG LLP) 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. (U.S. Equipment Leasing Association)

11 11 PACKAGER The leasing company, investment banker, or broker who arranges a leveraged lease. (U.S. Equipment Leasing Association) PRESCRIBED PROPERTY Refers to exempt property and assets with a fair market value of $25,000 or less per lease. It is used for the purposes of the federal Income Tax Act Section 16.1 lessor/lessee election introduced in April (Leasing in Canada [Third Edition], Ralph Selby, FCA, PRESCRIBED RATE This is the interest rate applicable to determine the portion of lease payments that are treated as notional repayments of principal under the April 1989 income tax revisions. The rate is set monthly and is one point greater than the long-term Government of Canada bond rate of the month before the immediately preceding month. (Leasing in Canada [Third Edition], Ralph Selby, FCA, PRESENT VALUE The current equivalent of payments or a stream of payments to be received at various time in the future. The present value will vary with discount interest factor applied to future payments. (U.S. Equipment Leasing Association) PURCHASE OPTION [See also Bargain Purchase Option, Fair Market Purchase Option, Fixed 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. (U.S. Equipment Leasing Association) PUT OPTION The requirement to purchase an asset at a particular time and at a predetermined price. In a lease transaction, this is a lessor s right to require the lessee (or some third party) to purchase the asset at the end of the lease term. (U.S. Equipment Leasing Association) RENTAL PAYMENT See Lease Payment RESIDUAL VALUE The estimated fair value of the leased property at the end of the lease term. (KPMG LLP) The value of leased property at the end of the lease term. (Leasing in Canada [Third Edition], Ralph Selby, FCA, The residual value is, unless otherwise stated on the lease, the estimated wholesale value of the leased vehicle at the end of the lease. (Turning the Lights on Leasing - Consumer Guide to Vehicle Leasing) The value of an asset at the conclusion of a lease. (U.S. Equipment Leasing Association) SALE LEASEBACK The sale of a property with the purchaser leasing the property back to

12 12 the seller. (KPMG LLP) The sale property where the purchaser leases it back to the seller. (Leasing in Canada [Third Edition], Ralph Selby, FCA, Butterworths, 1999) 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. (U.S. Equipment Leasing Association) A lessee sells property owned by it to the lessor and simultaneously leases the same property back from the lessor. The usual objectives are: (a) to free cash in the amount of the purchase price for other uses by the lessee; (b) for benefits not otherwise available, such as a deduction for rental payments instead of depreciation. (Blake, Cassels & Graydon LLP) SALES-TYPE LEASE A capital lease which at the inception of the lease, the fair value of the leased property is greater or less than its carrying amount resulting in a profit or loss. (KPMG LLP) Lease normally arising when a manufacturer or dealer uses leasing to effect a sale of its products; such lease transactions give rise to two types of income: the initial profit or loss on the sale of the product at the inception of the lease, and finance income over the lease term. (Leasing in Canada [Third Edition], Ralph Selby, FCA, 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. (U.S. Equipment Leasing Association) SKIP PAYMENTS Payments which are not required to be made during a specified interval (e.g., the first payment may be due in 90 days, which would be a "threemonth skip". (Leasing in Canada [Third Edition], Ralph Selby, FCA, SMALL-TICKET LEASING Typically, financing transactions under $100,000. (Under US$100,000 in the United States - U.S. Equipment Leasing Association) SPECIFIED LEASING PROPERTY Essentially, depreciable property leased by a lessor to a lessee for a term of more than one year. Leasing having a fair value of $25,000 or less per lease are excluded and it does not include intangible property, including systems software, certified feature films or certified productions. (Leasing in Canada [Third Edition], Ralph Selby, FCA, STRETCH LEASE An agreement whereby the lessee has the option, at the end of the primary lease term, to either extend the term of the lease or purchase the asset; should lessees choose to extend the term, they have no purchase option later; the present value of the extended rent usually equals the value of the option price. (Leasing in Canada [Third Edition], Ralph Selby, FCA,

13 13 SYNTHETIC LEASE One of a variety of agreements designed to simulate a lease. (Leasing in Canada [Third Edition], Ralph Selby, FCA, [See also: "Synthetic Leases in Canada" by Jeffrey Taylor at 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. (U.S. Equipment Leasing Association) UNGUARANTEED RESIDUAL VALUE That portion of the residual value of leased property which is not guaranteed (or is guaranteed by a party related to the lessor). (KPMG LLP) UPGRADING The replacement of an asset with a similar but more serviceable asset, generally in an attempt to forestall or correct obsolescence. (Leasing in Canada [Third Edition], Ralph Selby, FCA, VENDOR LEASING The 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 manufacturers 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. (U.S. Equipment Leasing Association) WEAR AND TEAR Every vehicle will experience normal wear and tear from every day use. Excess wear and tear is over and above expected normal wear and tear. The lease may describe what excess wear and tear means. Examples of excess wear and tear include: bald or mis-matched tires, body damage, missing parts or interior rips and tears. (Turning the Lights on Leasing - Consumer Guide to Vehicle Leasing)