LEASING 101
Unfamiliar with the basics of leasing? Learn more about the ins and outs of financing alternatives and find answers to some of the mostly commonly asked customer questions.
A lease
is a simple and economical way to obtain the benefits of the latest technology
without assuming the up-front costs, and
risks, of ownership. Simply defined, a lease is a usage agreement between an
equipment owner (the lessor) and a user of that equipment (you, the lessee).
The lessee pays a periodic fee, usually monthly, to the lessor for the use of
the equipment. Leases most often take the form of written contracts with
specific terms and conditions spelled out: length of term, amount and timing of
payments, and any end-of-lease conditions or restrictions.
The lessor is usually viewed as the owner of the equipment
during the lease term, but depending on the type of lease you select either you
or the lessor may be able to claim the benefits of ownership for tax purposes. Learn more about the various types of lease
structures available.
Regardless of which type
of lease you choose, the future expected value of the equipment (the residual
value) is considered when pricing most types of leases. The residual value is
the lessor's estimate today of the equipment's value when the lease term ends.
At the end of your lease term, you'll have the following alternatives (depending on the type of lease you select):
Compaq Financial Services offers a range of financing alternatives to meet your specific needs:
Also known as a true lease, an FMV lease generally provides the lowest monthly payment, offering lease terms of 18, 24, 36, or 48 months. The lessor (Compaq Financial Services) retains ownership of the asset for tax purposes, and the lessee (you) typically claims all lease payments as an operating expense or tax deduction.
At the end of the lease term, you can either:
This type of lease is primarily designed for customers who want to own the equipment after their lease term ends. With a finance lease, you (the lessee) claim ownership of the asset for tax purposes (although Compaq Financial Services is the actual owner), so you can claim depreciation and interest expense deductions.
There are two types of finance leases:
$1 Buyout Option
Best suited to businesses that plan to keep the equipment beyond the lease term.
At the end of the lease term, the customer may:
10% Buyout Option
Best suited for customers who want greater flexibility at the end of the lease term.
At the end of the lease term, the customer may:
Our Master Lease Agreements are offered to companies that plan to acquire and install equipment over time. Through this program:
Paperwork to add or upgrade
equipment is minimal.
Businesses just starting out often
have difficulty obtaining credit, but we can help. With our New Business Lease,
companies less than two years old can take advantage of the many benefits of
leasing and financing. Qualifying customers can finance up to $25,000 of Compaq
hardware, software, and/or services under this program (certain conditions
apply).
Contact Us� (connection to internet required for this link) ��- Find the Product Sales Executive in your area or call us at 1-888-377-8733 for more information.
The Cost-Effectiveness of
Pre-Owned Equipment
Whether you are trying to reduce your computing costs or looking for hard to
find equipment, pre-owned technology may be the answer. Our pre-owned equipment
is
Who knows Compaq products - including Digital technology - better than a Compaq company?
Inventory (connection to internet required for this link) �- View a sampling of our pre-owned equipment inventory. If you don't see what you're looking for here, just ask us.
Get
Cash or Credit for your Existing Equipment
If your equipment
meets certain requirements, Compaq Financial Services can issue trade-in
credits toward the purchase of your new solution. Or we can buy it back from
you, enabling you to acquire new technology.
Eliminate Headaches Associated with Disposition
For equipment
with no market value, disposition is a tricky proposition. CFS' process for
recycling this equipment:
Logistics
and Transportation
Compaq Financial
Services also offers the convenience of a full-service logistics and
freight-forwarding operation
What
is a lease?
In simple terms,
a lease is a contractual arrangement between the lessee (the customer) and the
lessor (Compaq Financial Services). We purchase the equipment from your
supplier of choice and lease it to the lessee for a fixed, regular payment.
Generally, there are two different types of leases: a true lease and a finance lease.
Can I cancel a lease agreement?
No, a lease is non-cancelable. However, Compaq Financial Services will work
closely with customers to ensure their needs are met with flexible early
buy-out, add-on, or technology refresh options.
When do payments start?
Typically, regular lease payments start 30 days after the lease
documentation is completed. To meet the unique needs of larger customers, we
can tailor invoice formats and payment schedules.
Do I need to insure the equipment?
Compaq Financial Services leases require that customers insure equipment
for its full replacement value and that proof of such insurance be provided.
Can I upgrade or
add-on to my leased equipment?
In most cases,
yes. This is one of the key benefits of leasing through a captive finance
company. Our goal is to provide the Compaq solution you need, when you need it.
Can the leased
equipment be moved?
Yes, with written
notice.
A
thorough knowledge of leasing terminology will help you evaluate all the
benefits of working with Compaq Financial Services.
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 it 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.
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.
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.
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 liability.
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.
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.
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.
Guideline Lease
A tax lease that meets or follows the IRS guidelines, as established by Revenue Ruling 75-21, for a leveraged lease.
Indemnity Clause
A clause in which the lessee indemnifies the lessor from losses and liabilities.
Indenture of Trust
(Indenture)
An agreement between the owner trustee and the indenture trustee in a leveraged lease: The owner trustee mortgages the equipment and assigns the lease and rental payments under the lease as security for amounts due to the lenders. Similar to a security agreement or mortgage.
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 under a lease. Others may define lease rate as the implicit interest rate in a lease based solely on the equipment cost and the minimum lease payments.
Lessee
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%) of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax benefits of ownership.
Modified Accelerated
Cost Recovery System (MACRS)
The tax depreciation system as introduced by the Tax Reform Act of 1986, generally effective for all equipment placed in service after December 31, 1986, prescribes depreciation methods for each Accelerated Cost Recovery System (ACRS) class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10, 15, or 20 year classes, depending on Asset Depreciation Range (ADR) lives.
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.
Net Lease
A lease wherein payments to the lessor do not include insurance, property taxes 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.
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.
Packager
The leasing company, investment banker, or broker who arranges a leveraged lease.
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.
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.
Residual Value
The value, either actual or expected, of an asset at the conclusion of a lease.
Sale-Leaseback
A transaction that involves the sale of equipment to a leasing company and a subsequent lease of the same equipment back to the original owner, who continues to use the equipment.
Sales-Type Lease
A capital lease from the lessor's perspective (per FASB 13) that gives rise to manufacturer's or dealer's profit to the lessor.
Single Investor Lease
A lease in which the lessor is fully at-risk for all funds used to purchase the leased equipment.
Small-Ticket Leasing
Transactions under $100,000, typically using conditional sale leases or single investor true leases.
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.
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.