Appendix 2.

APPENDIX 2
A
Leasing and Hire-Purchase Glossary

Acceleration Clause A stipulation in hire-purchase agreements that upon default in payment of any
one instalment, the full outstanding balance of the price shall immediately become due. The acceleration
clause confers upon the owner the right, while keeping the agreement alive, to recover from the defaulting
hirer the full unpaid balance of the hire-purchase price.
Accelerating Rentals Where rate of rentals is lower in the initial years gradually increasing towards
later years.
Accommodation Transaction Where the owner of some goods sells them and then by an independent
contract hires them back from the purchaser under a hire-purchase agreement, giving the latter a right to
retake in default of payment, the substantive effect of the transaction being that the original owners is
receiving a sum of money the repayment of which is secured by a right of seizure over the goods, the
transaction is called accommodation, or sale and hireback. Compare with sale and leaseback.
Actuarial Rate of Return The rate at which profits can be withdrawn from a lease for payment to
equity investors. The rate is a constant return on the quantum of net investment in a lease from equity
sources.
Amortisation The term is used in two senses: (i) repayment of principal and interest components of a
loan, usually by level amounts, over a period of time; (ii) write-off of an expenditure (like issue cost of
shares, pre-incorporation expenses) over a period of time.
Appropriation of Payments Where the liability of the hirer under the hire-purchase agreement falls
under different heads, as where separate payments are designated for accessories, insurance and so on,
then unless otherwise provided in the hire-purchase agreement, he is entitled to appropriate payments he
makes to such heads or liability, as he thinks fit.
Assignment The legal transfer of title to property. Where a lessee places an order for equipment prior
to entering into a leasing transaction, the lessor can acquire title to the equipment through the lessee
assigning the purchase order. The lessee, however, continues to remain liable to the supplier for the
performance of his obligations. The hirer under a hire-purchase agreement may assign the benefit of
hiring in case where the agreement is silent in this regard. The right of assignment may be restricted, but
any express clause imposing such restriction does not render unlawful an assignment by the hirer of his
interest in the goods.
At-risk Investment In a leveraged lease, the part of the lease which is financed by the owners equity or
a recourse debt, i.e., the total lease value minus the non-recourse debt (which is not at risk since it is
non-recourse to the lessor).

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 2.2 Financial Services

Back-loaded Lease A lease where the rents are higher towards the end. Also called rear-end loaded
lease. Contrast with front-loaded lease.
Back to Back Lease A transaction in which equipment which is leaded is sub-leased immediately to the
actual user. A manufacturer or dealer leases his stock to a leasing company, who leases it the manufacturer
or dealer, either to be used by the latter, or for further subletting. It differs from direct letting to the
customer, since the liability to pay rests with the manufacturer/dealer.
Balloon Leasing One that is expected to leave a zero residual value at the end of the lease period.
Sometimes also taken to mean a lease in which the rate of rentals is low at the inception, high during the
mid-years and low during the end.
Balloon Payment A pattern of lease rental payments in which rentals are quite low during the primary
period with a large payment at the termination of the lease.
Bargain Purchase Option A lease provision in which the lessee is given an option to acquire the leased
asset for a price sufficiently lower than the expected fair market value and where the exercise of such
option appears to be reasonably certain at the time of the inception of the lease. In India, such option does
not usually appear in a lease agreement.
Bargain Renewal Opinions A lease provision which allows the lessee at the expiry of the first lease
period, at his option to renew the lease for a rental sufficiently lower than the expected fair rental value of
the property and where the exercise of such an option appears to be reasonably certain at the time of the
inception of the lease.
Big Ticket Lease A lease of high value items such as aircraft, ships, satellites, power plants, etc.
Block Discounting A method of collection under retail hire-purchase, under which the dealer enters
into the hire-purchase agreement direct with his customer and later discounts it with the finance company.
Agreements are usually discounted in blocks at a time, hence the phrase block discounting.
Broker A person who acts as an intermediary and arranges lease deals between a lessor and a lessee for
a fee.
Burdensome Buy-out Clause Where the escalation clause or an indemnity clause in a lease
agreement becomes enforceable, the lessee may be provided with an alternative to avoid such clauses and
purchase the asset at a price sufficiently higher than the termination value. Such clause is called burdensome
buy-out clause, and such buy-out is called burdensome buy-out.
Call Option An option that entitles the holder to purchase an asset at a particular point of time in future.
It is equivalent to bargain purchase option.
Cancellable Lease An operating lease designed for fast technology items where the lessee is given
an option to cancel the lease after giving a certain periods notice and paying the prescribed penalty. Such
leases avoid the risk of obsolescence for the lessees.
Capital Lease A financial lease which satisfies any of the following: (a) The lease transfers ownership
to the lessee at the end of the lease term; (b) The lease contains an option to purchase the property at a
bargain price; (c) The lease term is equal to 75 per cent or more of the economic life of the property; (d)
The present value of minimum lease rental payments is equal to 90 per cent or more of the fair market
value of the leased property less related investment tax credit retained by the lessor.

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 Appendix 2.3

Capital Recovery The part of the lease rentals which a lessor ascribes to recovery of his capital, as
against finance charges. There are various recognised methods for this purpose, the mode commonly used
one being based on the IRR.
Captive Leasing Companies A leasing company, usually a subsidiary of the parent manufacturing
company, used to promote the sale of capital goods manufactured by another company.
Certificate of Acceptance A document whereby the lessee acknowledges that the equipment to be
leased has been delivered to him, that it is acceptable to him, and that it has been manufactured or
constructed in accordance with specifications.
Charge A charge operates as an encumbrance on the property charged and in no way vests any interest
in such property in the chargee. Certain charges including mortgages are required by companies to be
registered under Section 125 of the Companies Act, 1956.
Closed-end Lease Contrast with open-end lease. Also used to denote a lease where the property
reverts to the lessor at the end of the lease period.
Co-hiring Where an owner lets out goods to more than one persons to be held under a hire-agreement
jointly, it is called co-hiring. The liability of co-hires may either be joint or joint and several.
Collateral Collateral security means an additional security made available to secure finance. In a lease,
the asset leased is a collateral security.
Collateral Contract In case of a tripartite hire-purchase agreement between the finance company, the
dealer and the hirer, certain contractual relations arises as between the dealer and the finance company and
the hirer and the dealer. These are called collateral contracts since there is no privity of contract as between
the parties.
Conditional Sale Contract A sale contract where the title to the asset is to pass to the buyer on
satisfaction of a condition, usually on payment of the last instalment of an instalment plan, or performance
of other conditions specified in the agreement. It differs from hire-purchase in that the party taking the
goods has not merely an option to purchase but a binding obligation to do so.
Consortium Lease A lease which is financed by a number of lessors (as joint lessors) with a view to
sharing the high value of the leased asset or the high risk factor associated with a lease.
Contingent Rentals Rentals where the amount is not specific but is contingent upon certain factors,
other than mere passage of time. The factors may be use-based, like the machine-hours for which the
machine has been used, or may be cost-based, like the price-index, interest-rate, etc.
Cross-border Leasing Leasing across national frontiers. A leasing activity in which the lessor and the
lessee are in different countries or are subject to different legal systems.
Dealer Leasing Leasing of goods by a person who deals in such goods, usually to promote the sale of
goods.
Direct Collection A method of collection under retail hire-purchase financing.
Direct Financing Lease A non-leveraged financial lease, having predictably certain lease rentals.
Direct Lease Non-leveraged lease.

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 2.4 Financial Services

Double Dipping A strategic structuring of a cross-border lease transaction which seeks to avail of
capital allowances on the same asset in more than one country thereby reducing the cost of the lease.
Dry Lease A variant of operating lease where the lessee pays the executory costs connected with the
leased asset like insurance, maintenance, repairs, etc. (contrast with wet lease).
Dual Currency Debt Debt raised to finance a lease transaction in which the interest and principal are
payable in two currencies. Such debt is accessed to provide a hedge against exchange rate fluctuations.
Dual Rate of Return A refined form of the conventional internal rate of return. A conservative
reinvestment rate is used for periods where the lease results in surplus of cash.
Economic Life The estimated period during which the leased asset is expected to be economically
usable by one or more users, with normal repairs and maintenance.
Equitable Mortgage Where a person delivers to a creditor documents of title to property with intent
to create security thereon, the transaction is called a mortgage by deposit of title deeds or equitable
mortgage.
Equity Participation In a leveraged lease the lessor is the equity participant, holding trust certificates.
Escalation Clause A clause in lease agreements which provides that the lease rentals shall increase on
certain eventuality, e.g., on increase in interest-rate or on non-availability of certain tax benefits.
Extended Term Agreement An agreement to renew a lease, commonly used to describe a guarantee
of a lease by a third party.
Fair Market Value At the maturity of lease, fair market value is the price a willing buyer will pay to a
willing seller for the equipment on an as is where is basis.
Fair Rental The rental expected for equivalent property under similar terms and conditions.
Financing Agreement An agreement between the owner trustee, the lenders, the equity participants,
the manufacturer, and the lessee setting out the obligations of the parties under the leveraged lease. Also
called participation agreement.
Fixed Price Purchase Option A clause in the lease agreement in which the lessee has the option to
purchase the leased asset at fixed price, on expiry of the lease term or on the transpiring of other events.
Flat Rentals Equal rentals over the term of the lease. Also called level rentals.
Floating Rentals Lease rental rates that are not fixed, but vary upward or downward, in response to
changes in certain predetermined parameters such as the prime rate, the availability of capital allowances, etc.
Front-loaded Lease A lease where the rental payments are higher in initial years, going down towards
the end. Opposite of back-loaded lease (or rear-ended loaded lease).
Full Payout Lease A lease which seeks to recover the investments in lease along with financing and
administration costs and profit from a single lease. This is also equivalent to the finance lease.
Full Service Lease A lease which obligates the lessor to provide maintenance, repairs and insurance of
the leased equipment.
Gross Investment in Lease The aggregate lease rentals and the residual value.

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 Appendix 2.5

Guaranteed Residual A residual value guaranteed by the lessee. The lessee agree to meet the deficit,
but surplus, if any, may or may not be passed to the lessee.
Hell or High Water Clause A lease clause reiterating the lessees unconditional obligation to pay lease
rentals for the entire lease term, regardless of any event affecting the equipment or any change in the
circumstances of the lessee.
Hire-Purchase Agreement An agreement under which goods are let on hire and under which the
hirer has an option to purchase them in accordance with the terms of the agreement.
Hire-Purchase Price The total sum payable by the hirer under a hire-purchase agreement in order to
complete the purchase of the goods to which the agreement relates. A total of cash-price and financing
charge.
Implicit Interest Rate The interest rate inherent in the lease payments. It is the discount rate which,
when applied to minimum lease payments and unguaranteed residual value, causes the aggregate present
value at the beginning of the lease term to be equal to the fair value of the leased property at the inception
of the lease minus any investment tax credit retained by the lessor. In brief, it is the rate which discounts
the lease rentals and the residual value to the cost of the asset.
Inception of a Lease The date of signing of the lease agreement when the property to be leased has
been constructed or has been acquired by the lessor. Where, on such date, the property to be leased has not
been constructed or acquired by the lessor, the date on which such construction is completed or the
property is acquired by the lessor, shall be the date of inception.
Incremental Borrowing Rate The expected interest rate on borrowings at a point of time.
Indemnity Clause A clause that seeks to protect the lender or lessor against changes in the economics
of a financing transaction; a clause whereby the lessee undertakes to indemnify the lessor against any costs,
risks, loss or liabilities arising due to use or operation or possession of the property.
Indenture Trustee In a leveraged lease, the indenture trustee holds the security interest in the leased
equipment for the benefit of the lenders and in case of default exercises the right of a mortgage. He also
receives rentals from the lessee and utilises them to pay the amount due to the lenders and the balance is
paid to the owner trustee.
Indexed Lease Leases, usually of real-estate, where the rentals are to escalate based upon price indices.
Instalment Sale Agreement Agreements under which the property passes immediately to the buyer in
the usual way, without any reservation of title by the seller, and the purchase price is available in instalments.
Insured Value A schedule included in a lease which states the agreed value of equipment at various
times during the term of the lease, and established the liability of the lessee to the lessor in the event the
leased equipment is lost or rendered unsuable during the lease term due to a causality.
Interim Rent When the delivery of a leased equipment is staggered over a period of time, or when a
lease agreement involves multiple deliveries, it is desirable that the lease term begins on the same date for
all or certain group of units. This may be for the administrative convenience of the lessee in paying bills or
simply so that all units come-off lease at the same time. In such arrangement, a daily rental accruing from
the date of delivery, acceptance and/or funding until the date on which the base term commences, is
charged, called the interim rent.

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 2.6 Financial Services

Investment Period Method A depreciation method for lessors, which apportions profit earned on a
lease in proportion to the net investment in the lease.
Lease Line A lease line of credit, similar to a bank line of credit, which allows a lessee to acquire
equipment as needed under the same basic terms and conditions without having to negotiate a new lease
contract every time.
Lease Term The period of lease.
Lease Underwriting A contract wherein a packager of lease financing facilities commits firmly to
enter into a lease on certain terms and undertakes the risk of arranging any financing.
Level Payments Equal rental payments over the lease tenure.
Leveraged Lease A lease arrangement under which the lessor borrow a substantial portion of the
purchase price from a lender, usually a commercial bank. It is generally a finance lease with following
features:
(a) At least three parties are involved: the lessor, lessee and a long-term creditor;
(b) The finance provided by the creditor is substantial to the transaction and without recourse to the
lessor; and
(c) The lessors net investment typically declines during the early years of the lease and rises during the
later years.
Loan Participant A lender in a leveraged lease.
Master Lease A lease line of credit which allows a lease to add equipment under the same basic terms
without negotiating a new lease contract.
Minimum Lease Payments for the Lessee All the payments the lessee is obligated to make or can
be required to make in connection with leased property, including residual rents or purchase options, but
excluding guarantees of lessors debt and executionary costs such as insurance, etc.
Minimum Lease Payments for the Lessor The payments considered minimum lease payments for
the lessee, plus any guarantee by a third party of the residual value or rental payments beyond the lease
term.
Minimum Payment Clause A clause in the hire-purchase agreement imposing a liability on the hirer to
make a payment over and above the arrears of hire-rent, in the event of the agreement or the hiring being
terminated before the property in the goods has passed to the hirer. The payment may be expressed to be
for depreciation of goods or by way of liquidated damages or compensation for loss of profit.
Net Investment in the Lease The gross investment in the lease less unearned finance income.
Net Lease A financial lease wherein, all costs in connection with the use of equipment are paid by the
lessee and are not set off against the rental. For example, taxes, insurance, repairs and maintenance are
paid directly by the lessee. Most capital leases and direct financing leases are net leases.
Net Net Lease Same as net lease, expect that the leases guarantees the residual value.
Non-full pay-out Lease A lease which is not a full-pay-out lease.

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 Appendix 2.7

Non-cancellable Lease A lease that is cancellable only (a) upon the occurrence of some remote
contingency, (b) with the permission of the lessor, (c) if the lessee enters into a new lease for the same or
an equivalent asset with the lessor, and (d) upon payment by the lessee of an additional amount such that
at inception, continuation of the lease is reasonably certain.
Non-recourse Debt In a leveraged lease, the lenders cannot look to the lessor in the event of failure
to repay. The lenders loans are secured by an assignment of the rentals, assignment of the lease and a
collateral lien on the equipment.
Non-renewal Penalty As alternative of a residual value at the end of the lease period, the lease
agreement may impose upon the lessee a penalty on failure to get the lease renewed.
Off-Balance-Sheet Financing Leasing is called an off-balance sheet financing method since the lease
obligations do not appear on the lessees balance sheet.
Open-Ended Lease A lease which contains a provision for the extension of the lease on pre-determined
terms after the end of the fixed period.
Owner Trustee In a leveraged lease the role of the owner (guarantor) trustee is to hold the title to the
leased asset for the benefit of the equity participant(s).
Packager A name used to describe the leasing company, investment banker or broker who arranges a
leveraged lease. Also called packer.
Peppercorn Rental The nominal rentals charged during the secondary lease period of a finance lease.
Percentage Lease Percentage lease requires the lessee to pay a fixed amount of rent for each period
plus a percentage of gross revenue received during the previous period. Such leases are common in real
estate.
Percentage Rentals The variables rentals in a percentage lease.
Primary Period The period, in a finance lease, during which the lessor expects to recover the full capital
cost of the asset, along with the calculated profit. The lease term is usually non-cancellable during the
primary lease period. The balance of the lease term is called the secondary lease period.
Purchase Option An option to purchase leased property at the end of the lease term. In some jurisdictions
(mainly in the UK, and its derivatives) purchase options are impossible if the transaction is to qualify as a
lease. In others (e.g. the French system and its derivatives), a purchase option in mandatory. In the US, if
the tax characteristics of a true lease are to be protected, the purchase option may not be at a price less
than the assets fair market value at the time the right is exercised.
Rear-End Loading The practice of constructing a rental schedule where larger lease rental payments
are made towards the end of the lease.
Release Where a hire-purchase agreement has been completely performed by one party but there are
obligations remaining unfulfilled by the other, the former may agree to release the latter from the outstanding
obligations and thereupon the agreement will come to an end by release.
Renewal Option An option at the end of the lease period to get the lease renewed for a further specific
period or in perpetuity.

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 2.8 Financial Services

Rental Rebate A clause in a finance lease comprising a refund of rentals to a lessee based on the
proceeds of the sale of the leased asset at the end of a lease. A device to ensure that the lessee does not
have to pay more than the asset cost and lessors interest.
Residual Dependence A sensitivity measurement test which quantifies the extent to which a lease
yield shall depend upon the residual value.
Residual Insurance An insurance policy guaranteeing a certain minimum value for the leased asset at
the end of the lease term.
Residual Sharing An agreement between the lessor and another party providing for a division of the
residual value between them.
Sales Aid Lease A form of lease designed to encourage business by offering the customer a package
deal including lease facilities known in the US as a vendor lease. Instead of outright purchase the
manufacturer or dealer allows the facility of leasing, so as to boost the sales.
Sale and Hire Back Sea accommodation transaction.
Sale and Leaseback A transaction which involves the sale of property by the owner and a simultaneous
lease of the property back to the seller.
Sale Type Lease A lease by a lessor who is manufacturer or dealer in which the lease meets the criteria
of a capital lease or direct financing lease.
Secondary Period The period in a finance lease which follows the primary lease period during which
lease rentals are usually placed at a nominal value, as the lessor would already have recovered his investment
and profit during the primary lease period.
Short-Term Lease Generally refers to an opening lease.
Skipped-payment Leases Leases specially designed for seasonal industries where the lessor skips the
rentals for the non-season period.
Staged Equity A lease financing where the lessor does not put up his full equity investment initially, but
pays his amount over a period of time in the lease. It is an instrument used to optimise lessors yield and
lessees financing rate.
Stepped Rentals Rental payments which vary from one another. Usually done for specific cash-flow
and/or tax reasons.
Strip Debt Debt in connection with a leveraged lease, arranged in terms with different maturities and
amortisation to improve the lessors cash flow and reduce the lessees costs.
Structured Rentals Rentals which are not flat over the lease term. Going up, or down, as per the
mutual agreement.
Sub-hire Same as sub-lease.
Sub-lease A transaction in which leased property is re-leased by the original lease to a third party, and
the lease agreement between the original parties remains in effect.
Swap LeaseAllows lease to exchange the equipment when the original equipment goes for a major
repair. The lessor makes arrangements for a swap.

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 Appendix 2.9

Tax Indemnity Clause Clause inserted into a tax-based lease avoiding for increases in rentals in the
event of legislation which adversely affects the lessors ability to claim tax benefits on the equipment.
Termination Schedule Leases sometimes contain provisions permitting a lessee to terminate the lease
during the lease term in case the leased equipment becomes obsolete/redundant to needs. The termination
schedule which values the equivalent at various point during the lease term. If the equipment is sold at a
price lower than set forth in the schedule, the lessee pays the difference.
Trial Period Lease It permits the lessee to use the equipment on a trial basis for a specified period of
time to decide whether or not it is worthwhile to use the asset.
Unearned Finance Income The difference between the lessors gross investment in the lease and its
present value.
Unguaranteed Residual Income The portion of residual value at risk for a lessor in computing
yield, that is, the portion for which there is no party obligated to pay.
Upgrade Lease It provides for automatic exchange of out-moded equipment with the latest updated
version of such assets. It is usually offered by the manufacturer-lessor.
Wet Lease Same as operating lease.
Walk-away Lease Same as closed-end lease.
Wrap Lease A typical lease where the lessee further sub-leases the equipment to the end-user, retaining
a fee and a share of the residual. Normally, the first lease term is longer than the second, to maximise the
first lessors tax deductions and so it is termed a wrap leasethe first lease wrapping the second.
Yield The interest rate earned by the lessor or equity participant in a lease, measured by the rate at which
the excess cash flows permit recovery of investment. The cash flow not needed for debt service or
payment of taxes go to amortising the investment of the equity participant.

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