Glossary of Leasing Terms · GLOSSARY OF LEASING TERMS Revised November 1997 CALIFORNIA DEBT AND'INVESTMENT ADVISORY COMMISSION 915 Capitol Mall, Room 400 Sacramento, CA 95814

GLOSSARY OFLEASING TERMS

Matt FongCalifornia State Treasurer and Chairman

California Debt and InvestmentAdvisory CommissionRevised November 1997

CDIAC 97-09

GLOSSARY OFLEASING TERMS

Revised November 1997

CALIFORNIA DEBT AND'INVESTMENT ADVISORY COMMISSION915 Capitol Mall, Room 400

Sacramento, CA 95814(916) 653-3269

I CALIFORNIA DEBT AND INVESTMENT IADVISORY COMMISSION

The CaliforniaDebt and InvestmentAdvisoryCommissionwascreated in 1981 to assiststate and local governmentsto mosteffectivelyandefficientlyissue,monitorandmanagepublicdebt.Tocarryoutitsresponsibilities,theCommissionmaintainsa data-baseof all publicdebtissuedinCalifornia,conductsa continuingeducationprogram,publishesa monthlynewsletterwithdebt is-suancedata and informativearticles,andconductsresearchtodevelopreports,guidelinesandbriefsontopicalissues. In 1996;theCommission'sresponsibilitieswereexpandedto includea mu-nicipaleducationprogramto helplocalgovernmentsto safelyandeffectivelyinvestpublicfunds.

Matt FongCaliforniaStateTreasurerand Chairman

PeteWilson LouisJ. PapanGovernor StateAssemblymanorCraigL.Brown ScottWildmanDirector StateAssemblymanDepartmentof Finance

Donald W. MerzKathleen Connell Treasurer/TaxCollectorStateController SonomaCounty

Vacant Robert LelandStateSenator FinanceDirector

Cityof FairfieldVacantState Senator PeterW. Schaafsma

Executive Director

FORWARD

The purposeof this glossaryis to provide a helpful refer-encetooltopublicofficialsresponsiblefor leasingdecisions.This glossaryis one in a seriesof publicationsby the Cali-forniaDebtand InvestmentAdvisoryCommissiondesignedto assistpublicofficialswithtax-exemptfinancing.

ACKNOWLEDGEMENTS

Thisglossaryisa revisionof the Glossaryof Leasing Terms,originallypublishedin 1992 by the CalifomiaDebt and In-vestmentAdvisoryCommission.The originalglossarywasadapted from Leases in California: Their Form and Func-tion, a study prepared for the CaliforniaDebt and Invest-meritAdvisoryCommissionbyRussellLombardandJamesDudickof TransoceanFunding,Inc., Lisa Cole of Cole &Associates,Joshua Coopermanof Gaston & Snow,andRobertButlerof PublicResources,Inc.

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GLOSSARY OF TERMS

This glossary is designedfrom the perspective of the tax-exempt leasing industry. The glossary defines many termsthat also apply to municipal bonds in general end othersthat have specific meaning for tax-exempt leases. Tax-ex-empt leasingterminology may vary bytransaction structure,the types of parties involved, and even by the individualsinvolved. For instance, one lessor may request that a les-see execute an acceptance certificate; another may requirean acceptance letter. In either case, the document servesthe same purpose.

The termsthat appearwithin the definitionsin bold-face are defined elsewhere in the glossary; certain com-monly used phrases such as asset, lessee and lessor,arenot highlighted at each of their references. Refer to theCalifornia Debt Issuance Primer, published by CDIAC, foradditional definitions that apply to the tax-exempt market ingeneral.

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Abatement n a legal conceptwhereby the lessee reducesits rent proportionatelyor totallyto the extent it does nothave use of the leased asset. For tax.exemptleases inCaliforniaandsomeotherstates,a lesseeisnot requiredtomakerentalpaymentswithoutuse of the leasedasset,per-mittinga terminationof rent. Some leasesallowa lesseetoabate partial payments if use of the asset is limited.Lessor(s)/investor(s)are likely to protecttheir interestsinleasesthat containabatementprovisionsby requiringthelessee tomaintaincasualty andrental interruption insur-ance.

Abatement Lease -- a typeofmulti-yeartax-exemptleasewherebythe lessee can committOmake lease paymentsfortheentireleasetermunlesstheleasedassetisnotavail-able for use, in whichcase abatementoccurs. (Thiscon-trastswitha tax-exemptlease with a non-appropriationsclause.)

Acceleration of Rents -- also called rentalacceleration;an option,found in some tax-exempt leases and exercis-able upona lessee default, that allowsthe lessor (or itsAssignees) to declareall future rentalsthendue and pay-able,

Acceptance Certificatem a certificateto be signedbythelesseeconfirmingthat a leasedassethas been fully deliv-ered, inspected,testedand accepted. By signingthe ac-ceptancecertificate,the lesseeacknowledgesreceiptof the

asset asorderedandthatit is inSatisfactoryoperatingcon-ditiorl. The acceptancecertificatefrequentlyservesas thedocumentthat authorizesthe lessororthe trustee tomakea paymentto the vendorfor the leasedasset.

Acceptance Date -- the date onwhichthe lesseeverifiesthatithas received,inspected,testedandacceptedas sat-isfactorythe asset under lease. Some lease transactionsuse the acceptancedate as the date on whichthe lesseebeginsitslease obligations.

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Advance Funding m a methodof fundinga lease beforelessee acceptanceof the leased asset. Lease proceedsare placedin an escrow account untiltheyare authorizedbe disbursed to the vendor(s) or contractors.

Advance Payment -- also called paymentin advance;apaymentstructureinwhichthelease paymentisdue at thebeginningof each periodto whichthe paymentrelates,asopposedto payment in arrears. In some leases, an ad-vance paymentmay also refer to the paymentof one ormoreperiodiclease paymentsuponlease commencementintheformof or inlieuof a securitydepositordownpayment.

Amortization_ the gradualreduction,redemptionorliqui-dation of the balance(outstandingprincipal)of an obliga-tion.

Arbitrage m the interestearned as a resultof the differ-encebetweentheinterestrateat whichfundsare borrowedand the rateat whichtheyare invested. The Internal Rev-enue Code requiresthat issuersof tax-exemptbondsaregenerallyto rebateto the U.S.Treasuryanyarbitrageearn-ingson the investmentof proceedsunlessthe obligationsatisfiesa rebateexception.Arbitragerestrictionsmustbeaddressedin the structuringof certificatesof participationas well as in other tax-exempt lease transactions in whichlease proceedsare funded and escrowedin advance forthe benefitof the lessee.

ArbitrageCertificate m a certificateof lesseepreparedbythe lessor's counsel, bond counsel, or tax counsel con-firmingthatthetax-exemptleaseandinvestmentofanypro-ceeds will not violate arbitrage rules under the IntemalRevenue Code. Also known as a No-arbitrage Certificateor a Certificateas toArbitrage.

Arrears _ alsocalledpaymentinarrears;a leasepaymentstructurewherepaymentisdueatthe endof eachperiodtowhichthe paymentrelates,as opposedto advance pay-

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ment. Paymentsin arrearsare moretypicalfor tax-exemptleases.

Asset m the itemsof personalor real propertybeingac-quiredbythe lesseethroughpaymentsovera periodof timepursuantto the tax-exemptlease.

Asset-BasedTransfer-- see Sale-leaseback.

Assignee -- the partytowhichan assignmentis made.

Assignment -- a transfer of legal rightsto another;typi-cally,ina tax-exemptlease involvingthetransferof theleaseand rentalpaymentsfromthe lessor toa paying agent ortrustee actingon behalfof the investorsorto the investorsdirectly.An assignmentmayalsobe usedwhereone inves-tor transfers its interestin the lease to another,especiallycommoninCOP transactions.Generally,the lesseewillbeasked to nominallyapproveand acknowledgeany and allassignmentsmadeby the lessor. However,most lesseesare themselvesprohibitedfrom assigningtheirrightsin orresponsibilityfor a leasedassettoanotherparty. If assign-ment by the lessee is permitted,.thelessee is requiredtoobtainthe consentof the lessorand to continueto complywithIRC restrictionsrelativeto the financing.

Bank-AffiliatedLeasingCompany-- a subsidiaryof a bankorbankholdingcompanythatisactiveasa lessor,frequentlyactingbothas lessor,lease broker and/orunderwriter.

Bank Qualified -- undercurrentprovisionsof the InternalRevenue Code, commercialbankscandeduct80% of theirinterestcostson funds used to acquireor "carry"tax-ex-empt obligations(bondsand leases)of governmentsthatborrowno morethan$10 millionin a calendaryear; other-wise, the interestcost is notdeductibleby the bank. Theavailabilityofthe interestdeductionon bank qualifiedleasesmakesthemmoreattractivetocommercialbanksthanobli-gationsof largerissuers.Commercialbanksmay investinnon-bankqualifiedleasesbutthe lossof the deductionfor

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interestcostson funds borrowedby the bank for the initialinvestmentin the lease requiresadditionalcompensationthrougha higherinterestrateinthe leasethan in a smaller,bank qualifiedtransaction.

Basis Point m an amountequal to one one-hundredthofone percent (.0001); a shorthandexpressionto describedifferencesin interestrates, e.g., the differencebetween7.00% and 7.10% is ten basispoints.

Blue Sky Laws m statutesenactedby stategovernmentsthatrelatetosecuritiesregistrationandprohibitionsagainstfraud,dealerandbrokerregulations.

Bond Opinion -- the opinionof counselspecializinginmunicipalbondsandothertax-exempttransactionsthatthelease transactionis legal,validandbindingon the lessee.The bond opinionmay also incorporatethe tax opinion.Lease transactionsfor small dollaramountsfrequentlydonothavea bondopinion.Inlargertransactions,bondcoun-sel may also provide a 10b-5 opinionrespectingcompli-ancewithsecuritieslawsanddisclosurerequirements.Mostwell-knownbondcounselarelistedina sectionof TheBondBuyer's Directoryof Municipal Dealers of the United States,informallyknownas the "Red Book."

Book Entry Registration-- refersto the systemof regis-trationof tax-exemptsecurities,generallypubliclytraded,includinglease financings,whereby individualsecurities(bondsorcertificates)arenotissuedto investors. Instead,a record is maintainedby an independentcompanythatrecordsthe ownershipof securitiesbymembersof the com-

_, party,usuallyunderwritersor financial institutions.Thesemembers(or"participants")arethenresponsibleforthe iden-tificationof the actual investorsthroughthe brokerageortrustaccountsmaintainedby thosemembers. The largestindependentcompanyperforming"bookentry"servicesisDepositoryTrustCompanyof NewYork;securitiesqualifiedas registeredfor bookentrysometimesare called DTC eli-gible.

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Call -- an option provided to the lessee to prepay the prin-cipal balance, accrued interest, and any prepayment pre-mium at specific dates during the lease term which are ear-lier than the normal maturity date.

Call Protection -- refers to the period of time during whicha tax-exempt lease cannot be prepaid; during this period,the investor is assured his yield and his investment is pro-tected from early termination. This is similar to protectionsprovided investors against early redemption of bonds. Theinvestment community also uses this term informally to meanthe payment premium.

Capital Lease -- an accounting term for a lease that pro-vides to the lessee all of the rights and obligations to anasset on a basis similar to circumstances had the lesseepurchased the asset on a conditional sale or installmentpurchase basis. Under FASB Statement 13, a lease is acapital lease if it meets one or more of the following cdteda:ownership of the asset is transferred to the lessee by theend of the lease term; it has an option to purchase the assetat a bargain price (frequently $1.00); the lease term equals75 percent or more of the useful life of the leased asset; orthe present value of the lease payments, including anypurchase pdoe, equals at least 90 percent of the fair marketvalue of the asset at the start of the lease term.

Capitalized Interest -- bond or lease proceeds that arereserved to pay interest for a period of time eady in the termof the issue. In construction projects, interest frequently iscapitalized through the construction period until the projectis accepted by the lessee.

Captive Credit Corporation -- a wholly owned subsidiaryof a corporate organization (usually a vendor) that leasefinances the productsof the parent corporation.

Certificate of Participation (COPs) -- a method of struc-turing and distributingtax-exempt leases to investors by di-viding the rental payments and lease into fractionalized in-

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terestsor shares for individualsale to investors.The shareis represented by a formal certificate,much like a bond.COPs can be placedprivatelyor soldpublicly.COPs gen-erallyare soldfor largeassetfinancingandtendtobe usedmore for real propertyrather than personal propertyacqui-sitions.

Certificateof Title-- an instrument,normallyissuedbystate.motorvehicledepartments, evidencingtitle to a motorve-hicle.The certificateof titlemay eithershowthe lessorasowneror it may notethe lessoras a securedpartyand thelesseeas owner. Physicalpossessionof certificateof titlemay remainwith the trustee.

Choice of Law Clause -- a clausegenerallyfoundin themiscellaneousprovisionsof the lease specifyingthat thelawsof a specifiedjurisdictionwillgovern in construingthelease.

Closing Costsm see IssuanceCosts.

Ciosing Date m alsoknownas issuancedate; thedate onwhichthelessororinvestorprovidesfundsequalto the prin-cipalamountof the lease eitherto the trustee for subse-quenttransmittalto the vendor(s)or to the vendordirectly.This term is mostcommonlyassociatedwith large COPstransactionswherethe executionof documentsoccursinaformal mannersimilarto bondclosings.

CommitmentFee m a fee sometimesrequiredbythe les-sorfromthedate itcommitstoactas lessorandfinancetheassetsunderthe lease, untilthe finalfundingdate. Thisfeeis mostcommonlyappliedin a transactionwhere there isalengthy periodbetweenthe commitmentby the lessorandthe actualfundingdate. The fee ensuresavailabilityof thefunds, and in certaininstances,availabilityof a specifiedinterestrate. The commitmentfee frequentlyisrefundedbyapplyingan equal amount as a reductionof the lessee'sfirstlease payment.Paymentof a commitmentfee maynotbe allowedunder local or state law where paymentscan


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only be made if the asset is available for use by the lessee.

Competitive Bid -- the response made by a vendor, con-tractor or financial service providerto a request for bid pro-posal, usually issued by a governmental unit. In tax-exemptleasing, the term usually describes how a vendor of an as-set is selected but may also describe how the lease financ-ing is selected, particularly among small-dollar volume pri-vately placed lease agreements or vendor lease agree-ments.

Competitive Sale B a term descnbing a method of setlingfinancial obligations(includingtax-exempt bonds, leases orCOPs) to the bidder presenting the best sealed bid (in termsof price and compliance with the transaction specifications)at the time and place specified by the issuer/lessee (as op-posed to a negotiated sale.)

Concluding Payment-- in a conditional sales agreement(where title to the asset is transferred to the lessee at incep-tion of the lease), thissum is payable by lessee to concludeor terminate the lease. Itwill include the outstanding princi-pal, accrued interest, and any prepayment premium.

Conditional Sales Agreement B a standard form of financ-ingagreement whereby a buyer acquires the immediate useof an asset (and title thereto) and the seller retains a secu-rity interest in the asset and the buyer agrees to pay theseller a series of payments equal to the cost of the assetplus interest. Therefore, the transfer of title is conditionallysubject to future payments. This is distinguished from aninstallment sale where the seller retains title untilall install-ment payments are made. In both forms of sale, for federaltax purposes, the Internal Revenue Code treats the assetas owned by the purchaser with payments to the seller con-stituting principal and interest; for a governmental pur-chaser, interest usually is tax-exempt. This term is some-times used interchangeably with the term tax- exempt lease;however, in California, there is an important distinction


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between the two (e.g., a leaseisconstitutionallylegaland aconditionalsaleisnotunlessitissecuredbya specialfund.)

ContinuingDisclosureAgreement-- a separatedocumentthat is incorporatedby reference intothe trust indenture,bondresolutionorordinanceforpurposeasrequiredbythe1994 amendments to Rule 15c2-12, requiring that the con-tractualundertakingsfor continuingdisclosureto be in awrittenagreementor contractfor the benefitof the holdersof the municipalsecuritiesbeingofferedon or afterJuly3,1995. TheAgreementliststhe itemsfromthe officialstate-ment thatwill be updatedand identifiesthe issueror obli-gated personas responsiblefor the itemin an annual re:port.Thecontinuingdisclosureagreementmustalsospecifythe date by whichthe annual financialinformationfor theprecedingfiscalyearwill be providedand identifiesthe re-positoriesto which it willbe provided. In additionto theannualfinancialandoperatinginformation,the 1994amend-mentstoRule 15c2-12 requirean undertakingto disclose,"in a timely manner", the occurrenceof eleven specificevents. These eventsare requiredto be disclosedwhentheyoccurtopreventtradinginthesecondarymarketbasedon a lackof informationaboutevents mostlikelyto affecttrading.

Contractorm see also.vendor;a term usuallydescribingthe party responsiblefor the constructionof the real prop-erty improvementsto be financedunderthe lease.

Credit Enhancement -- a way to protect investorsfrominvestmentrisksby havinga thirdparty provideinsurance,a guaranty,oradditionalcollateral(e.g.,a letterof credit orguaranteedinvestment(GIC))to ensureperformancebythelesseeof itsobligationsunderthe lease. The investorsandany ratingagencieswillevaluatethe creditbasedupontheparty providingthe enhancement;assumingthisparty has

• a highercreditratingthanthelessee,theratingof theoveralltransactionwillbe improved,resultingina lowerinterestcostto the lessee. A creditenhancementusuallyprovidesas-surancestotheinvestoragainsttherisksof non-appropria-


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tion or abatement aswell as againstthe creditriskof thelessee.

Credit Enhancement Provider -- the party supplyingthecredit enhancement. ,

Credit Rating -- an independentappraisalof the creditqualityof a bondissueorlease, usuallysuppliedbya creditrating agency.

CreditRatingAgency-- an organizationthatanalyzesnewand outstandingobligations of the public and private sec-tors and assignsa rating as to their comparative credit qual-ity to help investors make their decisions as to the rate atwhich they will loan funds. The three largest organizationsare Moody's InvestorsService,Standard & Poor's Corpora-tion and Fitch InvestorsService.

Cross-Default ProvisiOn -- a clause, if included in a lease,which states that if an event of default arises in other obli-gations of the lessee, it becomes an event of default underthe lease.

Debt -- an obligation arising from the borrowing of moneyto be repaid over a period of time, and if over a multi-yearperiod, subject to state and local constitutional provisions,statutes, and judicial and administrativedeterminations. InCalifornia, tax-exempt leases with non-appropriation orabatement clauses are not considered debt under theOffner-Dean seriesof courtcases.

Default" the failureof the lesseetopaypaymentsor othersumsor obligationswhenclueunder the lease or failure toobserve a representationor warranty in the lease or viola-tion of a covenant in the lease, and the expiration of appli-cable periods to cure the default. An event of non-appro-priation or abatement is not normally considered an eventof default, even when the remedies aresubstantially similarfor each event.


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Defeasance m the terminationof the obligationsof a is-suer/lesseeby providingfor the full prepayment of itsobli-gations. Frequently,a properlydocumented,usuallylarger,tax-exemptlease can be defeased(likea bond)by the de-positof sufficientfundswithatrustee topaythe futureleaseobligationsuntilmaturityor untilthe firstdate permittedforprepaymentof the lease. Dependinguponthe structure,the amountof fundsto be depositedmaybe determinedbygivingeffectto investmentearningsto-bededved fromthefunds deposited,particularlywhen investmentsare madefor statedmaturitiesand at pre-determinedrates. Defea-sance is differentthan prepaymentbecause althoughthelessee'sobligationsare fullysatisfied,the leaseandthe re-lated certificatesremainoutstandingto be paid later fromthe fundsdeposited,avoidingany prepaymentpremiumorsimilarobligation. Defeasance usuallyoccursif a lesseewishesto dischargeits obligationsbeforethe call protec-tion periodhasexpiredandassumingthe leasespecificallypermitssuchactions.

Delphis-HanoverScalem an indexwhichispublishedregu-ladyandreportsthe currentlevelof interestratesapplicableto municipalsecuritiesof variousratedqualityand term.

Disclaimer of Warranties -- a referenceto typicalprovi-sionsof tax-exemptleasesunderwhicha lessor,who isnota vendor,will disclaim(reject)any and all responsibilityforthe suitabilityor performanceof the assetsselectedby thelesseeto be financedunderthe lease agreement.

Disclosure= informationprovidedonthe issuer/lessee,to•permit an investorto evaluatethe creditworthinessof theissuer/lessee,the risksassociatedwiththe financing,andtheappropriateyieldrequiredbythe investorfor the invest-ment. The informationmustincludefinancialdata. Undera1989 ruleof the federalSecuritiesandExchangeCommis-sion(Rule 15c2-12) andsubsequentamendmentsto theRule adopted in 1994, the timing and filing of disclosurestatementsrelatingtotax-exemptfinancingshavebeenregu-lated. Disclosure is usually provided through an official or


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offeringstatement orforprivateofferings,a privateplace-ment memorandum.

Disclosure Counsel--- specialcounselhiredby issuerstoassistthemin understandingand pursuingtheirdisclosureresponsibilitiesin connectionwithprimaryofferingsand indeterminingwhen and how to providesecondarymarketdisclosure.Dependingontheneedsof the issuerandchar-actedsticsof the financing,there are a numberof servicesdisclosure counsel may provide including: preparing anydisclosuredocuments,providingopinionson the accuracyand adequacyof disclosuredocumentsand coordinatingthe expertisenecessaryto completedisclosuredocumen-tation.

EffectiveInterest Rate--- see alsoimplicitrate; therateofinterestpayable by the lesseetakingintoaccountaccruedand capitalized interest, issuance costs, discountsandpremiums. (As opposedto Nominal InterestRate.)

Enterprise Lease -- see Lease Revenue Bond.

EnvironmentalLawOpinion-- an opinionof counsel(spe-cializinginenvironmentaland hazardoussubstanceslaw),which may be requiredin some real propertyfinancings,respecting the environmentalor toxicsubstancesliabilitiesassociatedwiththe propertybeingfinanced.Ownersof realproperty(and potentiallytheir lenders)may incurliabilitiesto remediatehazardoussubstancespresentor associatedwiththe property.

Equipment Schedule -- the scheduleorexhibitto a leasewhichidentifiesthe propertybeingleased.

EscrowAgentm alsoknownas trustee; usuallya financialinstitutionthat providesadministrativeservices,throughanescrow agreement, for the benefit of the parties to a fi-nancingincludingthe executionand deliveryof COPs, thesafekeepingof proceeds,and holdingphysicalpossessionof titledocumentsfor the leasedasset. Dependingon the


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leasestructure,theescrowagentmayhaveotherresponsi-bilitiessuch as disbursementof funds to vendors,invest-mentof reserveandacquisitionfunds(untildeliveryor con-structioniscompleted)andarbitragecalculations.InCOPs,the escrowagent'srole may also includethe collectionofleasepaymentsfromthelessee(s)and the regulardisburse-mentof paymentsof principaland interestto investors.

EscrowAgreement -- alsoknownas a TrustAgreement;a legaldocumentthat outlinesthe dutiesand responsibUi-tiesof theescrowagent. Thisagreementspecifiesthetermsof the securitiesissuedincludingmaturitydates, interestrates, securityfor payment, redemptionprocedures,rightsof prepayment,etc. When transactionproceedsare to beheld by the escrow agent, the agreement specifies the pur-pose,thedocumentsandauthorizationneededfor disburse-ment,and dictatesthe use of earningson funds heldpriorto disbursement. The agreement also covers other proce-duralmatterssuchasdealingswitha credit enhancementprovider, compensationor replacementof escrowagent',etc.

Essential Use Certificate -- a certificateexecutedby thelessee indicatingthatthe assetbeingleased isessentialtothe lessee's governmentalpurposesand daily activities.Lessorsin almostall tax-exemptlease transactionswithanon- appropriations provisionrequireconfirmationof es-sentialuse fromthe lessee,eitherthrougha representationin the lease ora separatecertificate,or both. In addition,for sometransactions,lesseesmayalsobe requiredto pro-vide a projectfeasibilitystudy andcertifythe feasibilityofthe leasedassetas wellas itsessentiality.

FASBStatement ! 3 -- theformal pronouncementof FASBrelating to leases and their accountingapplications;theGASB has specifiedthat FASB Statement13 is the stan-dard by which governmentsusinggenerallyacceptedac-countingprinciplesare to reportandaccountfortheirleasetransactions.

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Feasibility Study -- a reportanalyzingthe practicalityof aproposedfacility includingreviewof operating,financial,engineering,and revenueestimates.

Financial AccountingStandards Board (FASB)m the in-dependentnon-profitorganizationsupportedby the publicaccountingprofessionand chargedwith the responsibilityof promulgatinggenerallyacceptedaccountingprinciples.

Financial Advisor(FA)-- a consultanttoa lesseewhopro-vides assistancein the structure,timing,terms and othertopicsconcerningnewor existingleases. A financialadvi-sor also assistsa lessee in analyzingcompetitivebidsre-ceivedinresponsetoa requestfor proposalor inthe prepa-rationof a preliminaryofficial statement needed for com-petitive sale.

FinancingStatement-- see UCC-1FinancingStatement,

Form 8038, 8038-G, 8038-GC, 8038-T -- formsof the In-ternal Revenue Service that governmentalborrowers(in-cludinglessees)mustcompleteto reportonthe issuanceoftax-exemptsecurities,their generalpurpose,theirgeneralfinancialterms,the exemptionusedfor tax-exemptprivateactivitybonds,and to transmitarbitragerebate amountstothe IRS.

Full Service Lease -- an operating lease in whichassetmaintenanceorotherserviceisthe responsibilityof the les-SOl',

Funding Date -- the date on whichfundsare transferredfrom the investor(s) to the vendor(s),or trustee if the les-see has not acceptedthe asset. Frequently,the closingdate, fundingdate, and acceptance date occur simulta-neously.

FundingResolution--the actiontakenbya governingbodythat authorizesthe governmenttoenter intoa leasefinanc-ing.


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GovernmentAccountingStandardsBoard (GASB)-- thestandard-settingbodyforgovernmentalaccounting.

Government Finance Officers Association (GFOA) -- anon-profitorganizationthatrepresentsstateandlocalfinanceprofessionals in the United States and Canada. Beginningin 1976, the GFOA,formerlythe MunicipalFinanceOfficersAssociation,has been inthe forefrontof promulgatingvol-untarydisclosureguidelinesforthe issuanceoftax-exemptsecurities.

Governmental Bonds -- a term used in connectionwithfederal arbitrage regulations meaning obligations (bondsor leases)thatare notprivate activity bonds.

Hell-or-HighWater Clause m a clausecontainedin mosttax-exemptleasesthatholdsthe lesseeresponsiblefor itslease paymentsand all other obligationsunderthe leaseregardlessof the statusof the leasedasset orany disputebetweenthe lesseeandany otherparty. Thisclausedoesnotpreventthe lesseefrom exercisingits rightto non-ap-propriate. In somestates,suchas California,the lease isaltered to permitthe lessee to terminaterentalpaymentspursuant to an abatement clause.

ImplicitRate m alsocalledthe effective interest rate; theinterestrateatwhichthe presentvalue ofallpaymentsmadeby the lessee, includingissuance costs and all rent pay-ments,willequal the assetcost.

incumbency Certificate _ a documentexecutedby thelessee (usuallythe lessee'sboardsecretaryor clerk)thatindicatesthe titleand authority(as well as providingfac-simile signatures)of personseuthodzedto execute anddeliverthe leaseandotherdocumentsor instruments.

Indemnity Clause -- a clause containedin mosttax-ex-empt leases that holdsthe lessor,trustee and credit en-hancement providerharmless from any loss or damagesufferedbythe lesseeor thirdpartiesdue to the use of or

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becauseof the leasedassetorthe tax-exemptlease;suchclausesmay also extendto facts and circumstancescon-cemingthe tax-exemptnatureof interestunderthe lease.

IndependentLessor--- a lessorthatis notaffiliatedwithabank,creditcorporationor anyotherorganizationor corpo-ration. The independentlessormightbe an investorusingitsownfundsor itmightbe a lease broker usingfunds re-ceivedor tobe receivedfromotherinvestors.

Installment Sales Agreement -- see Conditional SalesAgreement andLease Revenue Bond.

Insured Value -- the valueat whichassetsare insuredforcasua(typurposesunderthe lease; usuallydefined to in-clude,at a minimum,the outstandingprincipal,accruedin-terestandany prepayment premium.

Integration Clause -- a clausegenerallyfoundinthe mis-cellaneousprovisionsof the lease specifyingthat the lan-guage intheleasedocuments(astospecifictermsprovidedinsuchdocuments)controlsoveranyandalloralorwrittenunderstandingsor arrangementsrespectingsuchitemspriorto executionof the lease.

Interest m compensationpaid for the useof moneyor thereturnon investmentfrom moneyinvestedor lent;the inter-est rateisthe interestchargeexpressedas a percentageofprincipal.

Internal Revenue Code (IRC) -- the codificationof federaltax laws enforcedby the U.S. government'sInternal Rev-enue Service.

Investorm in a tax-exemptlease, the partythat providesthe fundsto pay for the leasedassetand benefitsfromthetax- exemptinterestwhetherdirectlyasa singleinvestororinconcertwithmanyinvestorsasa purchaserofcertificatesof participation.


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IssuanceCosts -- costsassociatedwithclosingandfund-ingthe principalamountof the lease including,but not lim-itedto,feesfor the bond, tax andsecuritiescounsel, print-ingcosts,credit enhancementcosts(ifany), credit ratingcosts(ifany), underwriter'sdiscount(asapplicable),finan-cial advisoror otherprofessionalfees,governmentalfilingcosts(ifany)and,whereappropriate,costsoffeasibilitystud-ies.

Issuance Date -- see Closing Date.

Issuer-- see Lessee.

Joint PowersAuthority (JPA)-- a publicauthoritycreatedby a joint exerciseof powersagreementbetweenany twoor moregovernmentalagencies. An authoritymayperformany functionwhichallpartiesto the agreementcan performindependentlyand whichwillbe of benefitto all parties. AJPAmayalsoissuedebttoconsolidatethefinancingofsev-eral projectswith a singlebond issueor purchasebondsissuedby localagencieswith the proceedsof their bondissues.

Lease Broker -- usuallyan independentleasingcompanythat negotiatesleasesbetween lesseesand investors. Alease brokermay serveas nominal lessor or may under-write orguaranteethe financing. In eithercase,the brokerassigns its rights and interests in the lease to an investor.

Lease Line of Credit -- an arrangementthat allowsa les-seeto makeperiodicwithdrawalsfroma lineof creditestab-lishedto finance lease acquisitions. The arrangementisdocumentedas a single tax-exempt lease with multipleequipment schedules. A schedule is executedfor and at

• the timeof each acquisitionbythe lessee.Administratively,a lineof crediteliminatesthe documentationhurdleof sepa-rate leases onsmaller-valuedassetsand ensuresa contin-ued fundingsourceat ratescompetitivewithlargertransac-tions. A leaselineof creditistypicallyutilizedin largerdol-


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lar financings with extended or vadable delivery schedulesor inlease pools.

Lease Poolm an arrangementwherebya numberof unra-.latedtax-exemptleasesare groupedtogetherforpurposesof a single publicoffedng. The governmentsare usuallysimilarin nature(e.g., schooldistricts)and are broughtto-gether through some commoninterestassociation. Thelease pool is differentthan a master lease which groupsthe leasingneedsof severaldepartmentsor agenciesin asingleissuer/lessee,suchas a stateor county.

Lease-Purchase Agreement -- see tax-exempt lease.

Lease Revenue Bond -- also referredto as lease-backedrevenue bond; a bond having as its repayment source alease to which projectrevenues have been pledged formakingregularpayments,althoughthesourceof leasepay-mentsmayalsoincludeGeneralFundrevenues. InCalifor-nia, such leases are frequentlyreferred to as enterpriseleases, installment sales agreements, or special fundleases.

Lease Term -- the lengthof timedudngwhichthe lesseehasan obligationtomakerentalpayments.The termshouldcoincidewithor be shorterthan the useful life of the assetbeingleased.

Lessee_ alsocalledthe issuer; ina tax-exemptlease,thelesseeis a unitof governmentotherwisequalifiedto issuetax- exempt obligationswhichfinances the acquisitionofassets throughthe tax-exemptlease by payingspecifiedsumsof interestandprincipalfor a pre-determinedperiod.In an operatinglease; the lesseeonlyuses the asset for apedodof timeandreturnsitto thelessor.Tobe tax-exempt,the lesseemustbe a qualifyinggovernmentalentityunderthe IRC.

Lessee's Counsel m the attorneywho providesthe opin-ionto the lessor(and,as applicable,the assign.ee,paying


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agent, or trustee) that the lessee is a governmental entity,is authorized to enter into the transaction, that it has doneso legally, that the officials executing the lease have theauthority to do so, that the lease is in compliance with allprocurement and other regulations, and that the transactionis legal, valid and binding on the lessee.

Lessor -- in a tax-exempt lease, the secured party (seesecurity interest) that may provide the funds and act asinvestor or that may assign its interest in the leased prop-erty to another party for these purposes. If the lessor is alsothe investor,the lessor benefits from tax-exempt income, inan operating lease, the lessor owns the asset and derivesthe tax benefits of ownership which include, as applicable,depreciation.

Lessor's Counsel- the attorney who providesthe opinionthat the lessor's involvement in the lease has been propedyauthorized and has been or will be entered into in compli-ance with lessor's corporate documents and procedures.Opinion of lessor's counsel is not provided in all leases, es-pecially in smaller dollar-volume transactions.

Letter of Credit.-- see also credit enhancement; a creditfacility from a financial institution in which the institutionagrees to provide specified funds to meet payments dueunder a tax-exempt lease, if the lessee does not make thosepayments. A letter of credit is used to allow the financialinstitution'scredit ratingto supplement that of the issuer andto provide additional securitythat money will be available topay lease payments. The financial institutior_is typicallyreimbursed for any funds drawn by the issuer or by a secu-rity interest in the asset.

Marketability -- a term used to indicate how readily an ob-ligation can be sold to lessors or investors. Also calledfinanceability. '

Master Lease m an arrangement that involves one leasedocument for the acquisition of different types of assets at

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differenttimesbyone lesseeor agenciesand departmentsof one lessee.

Municipal Securities Rulemaking Board (MSRB) -- anindependent,self-regulatoryorganizationestablishedbyfederal law with general rulemaking authority municipal se-curitiesmarketparticipants(generally,brokersanddealers).The MSRB proposesand adoptsrulesconcerningprofes-sionalqualificationsstandards,rulesof fair practice,recordkeeping,the scopeand frequencyof complianceexamina-tions, the form and contentof municipalbondquotations,and sales to related portfoliosduring the underwritingpe-riod.

Negotiated Saie -- 'themethod of seUingobligations(in-cludingtax-exemptbonds,leasesorCOPs)wherethetermsof the obligation,in particularthe interestrate, arenegoti-ated betweenthe lessee and the financingsource(as op-posedto competitivesale).

Net Interest Cost -- a technicalmeasureof the interestcostof a leaseor bondderivedby addingtogetherall inter-estpaymentsfor the termof the issueor lease anddividingthat sum by the sum for all bondsof the amountof each•bond multipliedby the number of years it is outstanding.Net interestcostdiffersfromtrue interest cost inthat NICdoesnottake intoaccountthe time value of money.

Net Lease -- see Triple Net Lease.

No-ArbitrageCertificate -- see ArbitrageCertificate.

NominalBuyout -- a provisioninsometax-exemptleasesthat allowsthe lessee to purchasethe lessor'sinterestinthe lease atthe end of the lease term fora "nominal"price,usually $1.00.

Nominal Interest Rate -- see effective interest rate; therateof interestoftenstatedina tax-exemptleaseorquotedby a lessor which does not include the effect of issuance

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• costs, discounts, premiums, or accrued and capitalizedinterest.

NominalLessorm anentitybroughtintoa tax-exemptleasetransactionforthe solepurposeof actingas lessorandasaconduitofacquiringtheassetfor leasetothe lesseethroughthetax-exemptlease. The nominallessormaybe a privateorganizationthatispaidfor itsservicesor maybe a not-for-profitorganization,suchasan existingdevelopmentagency,ora corporationorganizedfor the solepurposeof actingaslessor. The nominallessorhas no responsibilitiesfor norrightsto the leasedasset.

I Non-appropriations Clause m a provisioncontainedin

someCaliforniaandmostnon-Californiatax-exemptleases• that allowsa lesseeto discontinueits lease paymentsif, in

futureyears,fundsare notappropriatedtomakeleasepay-ments (usuallyfollowinga best effortsundertakingby thelesseetoobtain the funds.) A lesseeisnotin defaultunderthe lease if it non-appropriates.Due to thisannualcondi-tion placed on the obligation to pay rant, the courts in manystatesview rentalpaymentsas operatingexpensesunderstate lawand, therefore,notas debt. In the eventof non-appropriation,the lesseelosesuseand possessionof theasset.

Non.appropriations'Lease -- a type of tax-exemptleaseinwhichthe leasecanbe terminatedif sufficientappropria-tionsare unavailableto continueitspayments. (Thiscon-trastswithan abatement tease.)

Non-substitutionClause-- a provisioncontainedinmanytax-exemptleasesthat restrictsa lesseefromsubstitutingotherequipmentor property,or as applicable,from obtain-ing the same equipmentor services from third-partyven-dors, to providethe servicesof-the assetsfor whichpay-mentshavebeen non-appropriatedor abated. Theperiodduringwhicha lesseecannotsubstitutecan vary from onemonthtoa yearor tothe termof the originallease.

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Obligation m any writtenpromiseor commitmentto paymoney or take certain actions.

Official Statement -- alsocalledan OS or OfferingState-ment; the documentbywhichthe issuerprovidesfinancialand other informationto potentialinvestorsrespectingthetransactionandthe issuerto permitmoreeducatedinvest-ment decisions. For privately placed transactions, thisdocument may also be called a private placement memo-randum. In a competitivesaleof COPs, the lesseeand itsadvisorsusuallypreparea preliminary official statement(POS) whichis distributedto prospectivebidders(under-writers) priorto the time.designatedfor submittingsealedbids. After the transactionis awarded,the final OS is pre-pared. In a negotiatedsaleof COPs,the underwriterusu-ally assistsin preparingthe OS and itsdistributionto pro-spectiveinvestorspriortothe pricingof thetransaction.Thereviewand distributionof officialstatementsisdiscussedinthe SEC's Rule 15(c)2-12.

Offner-Deancasesm Offnerinvolveda proposedlong-termlease of an incineratorto be erected on City-ownedlandand leasedbythe lessorto the City. The leaseprovidedforpurchaseoptionsat specifiedperiodsat the greater of aminimumpricespecifiedin the bid or an appraisedvalue.The leasewaschallengedonthe basisthatit constitutedaninstallmentsale over a multi-yearperiodand violatedthedebt limitations.The court heldthat the proposedagree-mentconstituteda lease,notan installmentsale, becausethe rentalsand purchaseoptionsrepresented"fair value".As statedby the court, wherethe lease obligation,even ifmulti-year,was entered into in good faith and confinedli-abUityfor rentwas for considerationof the asset furnishedduringthe year, "no violenceis done to the constitutionalprovision."The rationaleinOffnerwas amplifiedin Dean v.Kuchel, a subsequentcaseinvolvingthe lease of a buildingby the State on a triple net lease basisover a multi-yearperiod. The leasewas structuredto conformto Offner, inthat the rentalwas "forand in consideration"of the facility.However,unlikeOffner, the State wasto receivetitleupon

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further expirationof the leasewithout any further payment,and inanyevent (even if the Statedefaulted),10 yearsfol-lowingthe statedtermof the lease. Notwithstandingthesefactors,the courtheldthe principlesof Offnerapplied.

On-behalf Of Agency -- see 63-20 Organization;a non-profit agencyor corporationorganizedto issue bondsorenterintoleasetransactionsonbehalfof a governmentoragroupof governments.The propertyso acquiredmustbeownedby the establishinggovernment(s).

Operating Lease m a type of lease that has none of thecharecteristicsof a capitallease for accountingpurposes.Inan operatinglease,the lesseehasuseof theleasedprop-erty but the lessorretainsownership,includingownershipfor taxpurposes.The implicitinterest rate inan operatinglease isat taxableratesandpaymentsare consideredrent(and not paymentsof principaland interest). The lesseeusuallymustagreeto maintainand insurethe propertyandpayallpropertyandsalestaxesinthe samemanneras inatax-exempt lease. Thistypeof leaseisfrequentlyusedforassets thatthe lesseewishesto use for short periodsthatare lessthan the fullusefulof the asset.

PayingAgentm in a COP or master lease arrangement,aparty appointedby the lessoror the lessee(s)as agent tocollectthe proceedsatthe saleof the COPsandothersumsprovidedbythe investorsand disbursesuchmoniesas di-rected bythe lessee(s). In addition,the payingagent col-lectsrentalpaymentsfromthe lessee(s)anddisbursesthemtothe investor(s)asdirectedbythe lessororunderanagree-mentwiththe lessorandlessee(s).Thisfunctionisfrequentlyperformed by the escrow agent, also called trustee.

Payment Schedule -- a scheduleor exhibitto the leasewith the date and amountof each paymentdue and theprincipaland interestcomponentsof each payment. For.purposesof the Internal Revenue Code to be tax-exempt,the interestcomponentof rentalpaymentsmustbe identi-fied and set forth at the inceptionof the lease. Most pay-

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mentscheduleswillalsoidentifythedateand priceat whichthe lesseecanexerciseitspurchase option.

PaymentTerms-- thefrequencywithwhichleasepaymentsare made. Dependingonthetransaction,paymentscanbemonthly,quarterly,semi-annually,or annually. Paymentscan be inarrears orin advance. MostCOPs callforquar-terlyor semi-annualpaymentsin arrears.

Premium-- the amountbywhichthe pricaof an obligationexceeds its principalamount; for tax-exemptleases, thisusuallyis expressedin the offeringmemorandumfor theCOPs (and may constitute funds available to the under-writer for issuancecosts and underwriter'sdiscount.

Prepayment Premium -- also called a prepaymentpen-alty;if a lesseeexercisesitspurchase option, it frequentlywill alsohave to paya prepaymentpremium. The amountof the prepaymentpremiumis generallyshownonthe pay-ment schedule as part of thetotalpurchase option price.The premiumincludesamountsnecessaryto coverissu-ance coststhat were includedin the originalprincipal orinterest ratefor the transactionbuthavenotyet been am-ortized.Theprepaymentpremiummayalsoincludeamountsto compensate for the early termination of the lessor/investor'sinvestment. In somecases, the premiumis ex-pressedas a specificpercentageof the remainingleaseprincipalobligation. However, in other transactions,theamount of premium is not clearly distinguished but is blendedinto a scheduleof prepaymentprices.

Present Value -- the equivalentvalue today of moneyavail-able in the future, either at one time or in a series of pay-ments. The present value is influenced by the interest ratefactor applied to the future payment(s).

Principal -- the amount loaned and repaid, usualiy the costof the asset and may include certain issuance costs. Inter-est is charged basedon the outstanding principal.

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Private Activity Bond n under federal tax law, bonds ofwhichmorethan (i) 10% or more of the proceedsare usedin the tradeor businessof nongovernmentalpersonsand10% or moreof the debt serviceis secured by or derivedfrompropertyusedin the trade or businessof nongovern-mentalpersons,or(ii)5%ormoreof theproceedsare loanedto nongovernmentalpersons. Intereston private activitybondsis tax-exemptonlyif certain requirementsofSection141 of the IRC are satisfied.

Private Placement m a methodof sellingfinancialobliga-tions(includingtax-exemptbonds,leasesandCOPs)wherethe investorsare a limitednumberof informedindividualorinstitutionalinvestorswhopurchasethe obligationsfortheirportfoliosand notfor resale(as opposedto a publicsale)..

PrivatePlacementMemorandum-- seealsoofficialstate-ment; the disclosure documentrespectingthe tax-exemptleaseand lesseepursuanttowhichprivateplacementsareofferedandsold.,

Progress Payments -- periodicpaymentsmadeto a ven-doror contractor for thecompletionof specifiedphasesordeliveriesofa projector asset. In a constructionproject,forexample,a contractorwill receivepaymentsin reimburse-mentfor workcompletedtodate or inprogress.Toguaran-tee thatthe projectwillbe totallycompleted,the contractormay be requiredto posta performancebond.

Property and Casualty Insurance m insurancethat les-seesare requiredtomaintainonthe leasedassettoprotectthe investorintheeventtheassetisdamagedordestroyed.The lesseecan be requiredto maintainthe insuranceforthe originalor replacementvalueof the assetorfor the out-standingprincipal balance. The lesseewillhave to signaCertificateof Insuranceorprovideotherproofthat ithastheinsuranceat the propervalue.

Public Sale -- a methodof sellingfinancialobligations(in-cludingtax-exemptbonds, leases, and COPs) where an


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underwriter offersthe securitiesto a largenumberof inves-tors in denominations as low as $5,000. Normally,a publicsale is made pursuant to an official statement.

Purchase Option -- a provision that gives a lessee theopportunity to purchase the leased asset at specific timesduring the lease term by.paying the then-outstanding princi-pal, accrued interest, and, as applicable, the prepaymentpremium.

Purchase Option Price -- the amount due to be paid by alesseeupon exercise of its purchase option. This amountincludes the outstanding principal, accrued interest, and, asapplicable, the prepayment premium. This amount mayalso serve as a casualty value or stipulated loss value forinsurancepurposes. Purehaseoption prices generally areshown in the payment schedule.

Quiet Enjoyment Clause -- a provision in the lease whichspecifically states that so long as a lessee is not in default,the lessee shall be entitled to the quiet use and enjoymentof the leased asset and that the lessor or its assigneesshallnot interfere or otherwise obstruct such use.

Quit Claim Bill of Sale -- legal evidence of a sale of anassetwithout warranty.

Rebate -- the payment of certain arbitrage earnings re-quired to be paid to the United States Treasury under theInternal Revenue Code.

Redemption-- therepaymentofprincipalofa leaseorbond.

Refunding -- a financingstructureapplicableto _]overn-mentobligations,includingtax-exemptleases,throughwhichthe obligationis redeemedbya newfinancingof the sameor a relatedissuer ongenerallymorefavorablefinancialorlegalterms. Refundingsare subjecttocertaincriteriaunderthe IRC.

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Registration-- see also book entry registration;the actof maintaininga listingof the namesandaddressesof theownersofmunicipalbondsandCOPs. Registrationusuallyis the responsibilityof the trustee or a registrar. However,every issuerof tax-exemptsecuritieswitha term inexcessof one year, includinglease transactions,is responsibleunderthe IRC for maintainingor causingto be maintainedthe registryof the holdersof itssecurities.

Renewable Lease-- a leasewritteninitiallyfor a shortterm(commonlyoneortwoyearsdependingonthelessee'sbud-get cycle)whichis renewablefor subsequentsimilartermsuntila fulltermequaltotheusefullifeoftheassetisreached.In manysuchleases, renewaloccursautomaticallyunlessthe lease isspecificallyterminatedby the lessee.

Rental Interruption Insurance -- a formof insurancethatprovides a flow of funds to protect investors in the eventthat leasedpropertyis notusableandthe lesseeelectstousethe abatement provisionsof the lease. If the asset isnotusableand,as a resultof the leasecontract,the lesseeis not required to make lease payments, insurance proceedswould be used to continue the payment stream unless oruntil the property is restored to a usableconditionor theinvestorsare paid the principaland interestdue. However,many rental interruptioninsurancecontractsare limitedtothe paymentof rentalsfor a fixed numberof years (com-monlytwo)whichperiodisdeemedadequateto restoretheassetto useablecondition.

ReserveFund -- a specialfundestablishedfromleasepro-ceedsfromwhichmoneyscanbe drawntomakeleasepay-mentsif the lesseeis otherwiseunable. The fund can besetupentirelyfromleaseproceedsorcanbe partiallyfundedbythe lesseeoverthe term of the lease. A typicalreservefund wouldbe an amountequal to maximumannual pay-mentsfor the lease,but notto exceed 10% of the originalprincipalamountof the lease.

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Rule 10b-5 -- a rule of the Securities and Exchange Com-missionunder the Securities Exchange Act of 1934, whichrequires that persons PUrchasing or selling securities(whether or not registered) not engage in any device orscheme to defraud or make any untrue statement of a ma-terial fact or omit to state a material fact to cause the disclo-sure statement to be misleading. The liabilitiesof failing todisclosemay extend to bond counsel, underwriter's coun-sel, underwriters and other participantsin the lease financ-ing.

Rule 15c2-12 -- a rule, effective January 1, 1990, of theSecurities and Exchange Commission (SEC) that governsthe review and delivery by underwriters of official state-ments released in conjunction with the sale of municipalsecurities. Rule 15c2-12 Amendments adopted bythe SECin 1994 and effective on or after July 3, 1995 prohibita bro-ker-dealer from acting as an underwriter in a primary offer-ing of municipal securities, in principal amount of $1 millionor more, unless it has reasonably determined that the is-suer or an obligated person has undertaken to provide an-nual financial information and notices of material events tovarious informationrepositories.

Safe Harbor -- an exemption from a rule or restriction pro-vided that the conditionsof the exemptionare satisfied.

Sale-leaseback -- an arrangement where one party sellsan asset it owns or is acquiring to another and leases itback so that the lessee receives an infusion of cash from.thesale of the asset but stillretains its use. The lease canbe structured as an operating lease wherethe new ownercan depreciate the asset or as a tax-exempt lease for whichthe new owner receives tax-exempt interestand the originalowner reacquires theasset. Inthe latter case, the sale-lease-back may be referred to as a sale-saleback. This structureis frequently used to permit lessees to employ the equity inassets they own to finance capital expenditures or otherprograms. For some governmental units, a sale-leasebackis not possible since some may only be permitted to

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sell propertyif it is"surplus"to itsneeds. Itwouldthen be acontradictionto firstdeclare an asset surplusfor the saleand immediatelydeclareit essential for the lease. Surpluspropertyrulesvary from onegovernmentalunitto anothereven within the same state.

Secondary Market -- a term describingthe purchaseandsale of securities(includingtax-exemptbonds,leases,andCOPs) betweeninvestorsat a timeafter the originalsaleofthe securities.Frequently,the underwriter will maintainasecondarymarketfor large issuesto facilitatethe orderlybuyingand sellingof the securitiesat any timeduringtheirterm. There isverylittlesecondary marketactivityfor indi-vidualprivatelyplacedtax- exemptleases. Somelargerin-stitutionshave soldpartsof theirtax-exemptlease portfo-liosto otherinstitutionsor publicunit trusts.

Section 103- the sectionof the Internal Revenue Codethat definesthe typesof governmentalunitsthat qualifyastax exempt.

Security Interest -- a legalclaimtopropertythat providessecurityto an investor(the securedparty) in the event theborrowerlesseefails to makeall paymentsotherwisedue.Security interests are usually granted under the terms ofthe lease agreement. In mostcases,securityinterestsarerecordedthroughthe filingof a UCC-1for equipmentor,forvehicleswithlicenseplates,by a notationon the vehicle'scertificate of tiUeof the securedparty'sinterest. Fortrans-actionsinvolvingreal property,the securityinterest is usu-ally recordedinthe same manneras a mortgagelien. Se-curedpartieshavesuperiorrightstocreditorsof the lesseerespectingthe assetsinwhichtheyhavea securityinterest,bothpriorto and in bankruptcyproceedings.

Simple Interest -- interestchargedonly on the principalamountand noton interestearnedbutnotpaid.

63-20 Organization -- a shorthandexpressionfor a non-profitcorporationcreatedbya municipalitytoactas nomi-


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nai lessor to buildand acquireassetsfor which the munici-pality is lessee. Its name is derivedfrom Revenue Ruling63-20 (of the InternalRevenueService)whichestablishesthe parametersfor thistypeof organization.

Subleasem also sublet;a documentor actbywhicha les-see allowsanotherpartyto usethe leasedasset. Subleas-_ingbythe initiallesseeisoftenrestrictedbythe termsof thetax-exempt lease. The restrictionsusuallyare meant toensure the continuationof the tax-exemptstatusand thesecurityof the odginallease.

Tax-ExemptLeasem alsocalleda municipallease,install-ment purchase lease, conditional sales agreement, or alease purchase agreement; a financing arrangementwherebya stateor localgovernmentor agencyor subdivi-sionthereof, as lessee, obtainsthe use and ownershipofan asset by makingperiodiclease paymentsof principaland interest. Because the lessee is a tax- exempt entityand will own the asset, and assuming compliance with theIRC and, inCalifornia,the RevenueandTaxationCode, in-terestit paysisexemptfor federalandstateincomeorfran-chisetax purposes.

Tax Opinion m the opinionof counselspecializingin tax-exempt obligationsthat the interestportionof rental pay-mentsreceivedby the lessoror investor(s)fromthe lesseeisexemptfromfederalincometaxesand,asapplicable,stateincomeorfranchisetaxes. The taxopinionmaybe incorpo-rated intothe bond opinionor be separatelyprovided.

Time Value of Money_ see also present value; an eco-nomicconceptwhichtakes intoaccountthe factthat fundsdue in laterperiodsmay have a diminishedpresentvaluedue to the interveningperiodand lossof investmentearn-ingsby the lenderuntilthe paymentisreceived.

TripleNet Lease_ alsocalleda net lease;a termdescrib-inga lease agreementwherethe lessee is responsibleforall maintenance, insurance, utility charges, taxes, etc.,

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associatedwiththeleasedassetandthatall leasepaymentstobe madearenetofall suchexpenses.Tax-exemptleasesareusuallytriplenet leases.

True Interest Cost -- see alsoeffective interest rate, netinterest cost; a measureof the interestcostof a lease orbondissuethataccountsfor the timevalueof money.

True Lease -- a lease,which doesnot involvetax-exemptinterest,in which(i) the lessorownsand receivestax ben-efitsofdepreciationonthe assetbeingfinanced,enjoysthebenefitandriskof anyresidualvalueat theendof theleaseterm,and is consideredthe trueownerof the assetand (ii)the lesseereceivesonlya righttouse (hasno equitybuild-up), can deductits rentalpayments(if the lessee is a tax-able entity)and hasthe optionto purchasethe assetat ap-proximatelyits fair marketvalue at the endof the lease.

Trust Agreement D see Escrow Agreement.

Trustee -- see Escrow Agent.

UCC-1 Financing Statement -- see also Certificate ofTitle;a form,thatonceexecutedbya lesseeandlessorandfiledwith the appropriatestate agency (viz., the Secretaryof State and, as applicable,the county recorder)recordsand perfectsthe lessor/investor'ssecurity interest in theleasedproperty.The UCC-1 is usedin the vastmajorityoftax-exemptleasesinwhichtitleto the leasedpropertyis inthe name of the governmentlessee.

Underwriter-- purchasesbondsor COPs fromthe lessee/issueror escrow agent withthe intentto resell the securi-ties to investors. In a firm underwriting,the underwriterguaranteesthe purchaseof securitiesat a predeterminedinterestrate. In a besteffortsunderwriting,the undenNdteragreestoutilizeall reasonableresourcesto sellthe securi-ties (butwithoutliabilitytodo so or topurchaseunsoldse-curities.) Where the purchaseis guaranteed,the under-


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writerwillusuallypre-sellthe certificatesto investorspriortoclosingor ifunableto, the underwriter,forat leasta tempo°rerypedod, may be the ownerof the certificates.

Underwriter'sConcession-- alsoknownasunderwnter'sspread;the amountdeductedfromtheproceedsof thesaleof securitiesby the underwriteras compensationfor theundeterminedsellingeffortsandrelateddsks.

Undarwriter's Counsel -- an attorneythat representstheinterestsof the underwriterin a negotiatedsale of COPs.Underwriter'scounselusuallywillreviewalltransactiondocu-mentsand willnegotiate issuesaffectingthe underwriter.Areas of particularconcernincludedisclosure and securi-tieslawscomplianceandregistration requirements.

Underwriter"sDiscount-- alsocalledunderwriter'sspread;the differencebetween the principalamountof a securityand the purchasepricepaidto the issuerorthe trustee bythe underwriter.

Useful Life -- a periodof time duringwhichan assetwillprovidethe desiredserviceto the partyusingit. The usefullife of a pieceof technicalequipmentcouldbe substantiallylessthan itsexpectedtechnicallife(e.g., computersduetotechnicalobsolescence.)

Vendor -- the selleror supplierof personalproperty.

Yield the rate of interestpaidto an investor.


Documents

Glossary of Leasing Terms · GLOSSARY OF LEASING TERMS Revised November 1997 CALIFORNIA DEBT AND'INVESTMENT ADVISORY COMMISSION 915 Capitol Mall, Room 400 Sacramento, CA 95814