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A Historical Overview of Leasing Practices and Legal Frameworks, Exams of Contract Law

A comprehensive historical overview of leasing, tracing its evolution from ancient sumerian practices to modern finance. it details key legal and tax developments influencing leasing, including the code of hammurabi, english common law, and significant us legislation. the text also explores various lease types, their accounting and legal implications, and alternative funding methods for businesses. this makes it a valuable resource for understanding the complexities of leasing in a historical and contemporary context.

Typology: Exams

2024/2025

Available from 05/01/2025

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CLFP Chapter 1: History & Overview
Questions & Correct Answers/ Graded A+
Code of Hammurabi
๐Ÿ—ธ๐Ÿ—ธ: Around 1750 B.C. - The Code of Hammurabi
โ€ข King Hammurabi acknowledged leasing of personal property in his Code of Laws
โ€ข First record of leasing law
Beginning of Leasing
๐Ÿ—ธ๐Ÿ—ธ: -Oldest record 2010 B.C. in the Sumerian City of Ur
-Used clay tablets for documenting leases for agricultural tools, land leases for agricultural tools,
land and water rights, oxen and other animals
Ship Charters
๐Ÿ—ธ๐Ÿ—ธ: - Early example of a true lease.
- Phoenicians were shipping and trading experts used ship charters to obtain a ship and crew.
-Other charters covered the economic life of the ship and required the lessee to assume the benefits
and obligations of ownership
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CLFP Chapter 1: History & Overview

Questions & Correct Answers/ Graded A+

Code of Hammurabi ๐Ÿ—ธ๐Ÿ—ธ : Around 1750 B.C. - The Code of Hammurabi

  • King Hammurabi acknowledged leasing of personal property in his Code of Laws
  • First record of leasing law Beginning of Leasing ๐Ÿ—ธ๐Ÿ—ธ : - Oldest record 2010 B.C. in the Sumerian City of Ur
  • Used clay tablets for documenting leases for agricultural tools, land leases for agricultural tools, land and water rights, oxen and other animals Ship Charters ๐Ÿ—ธ๐Ÿ—ธ : - Early example of a true lease.
  • Phoenicians were shipping and trading experts used ship charters to obtain a ship and crew.
  • Other charters covered the economic life of the ship and required the lessee to assume the benefits and obligations of ownership

Statute of Wales ๐Ÿ—ธ๐Ÿ—ธ : English Common Law

  • Used in England to deal directly with the leasing of personal property
  • Further clarified in 1571 to define who actually owned the leased property Railroad Industry - Industrial Revolution ๐Ÿ—ธ๐Ÿ—ธ : - In the UK and the United States, the railroad companies could only afford the tracks
  • Sought financing from private, the investors for the railroad locomotives and companies railcars could only afford
  • Accomplished through the track equipment trusts
  • Most well-known finance plan was the Philadelphia Plan Post WWII, there was an economic slump ๐Ÿ—ธ๐Ÿ—ธ : - The government tried to stimulate the economy and in 1953, Section 167 of the Internal Revenue Code was issued
  • Gave the owner/lessor the ability to take ordinary payments into income associated with a lease and accelerate depreciation
  • Designed to encourage capital spending ITC ๐Ÿ—ธ๐Ÿ—ธ : Investment Tax Credit
  • Eliminated the Investment Tax Credit (ITC) 1990s ๐Ÿ—ธ๐Ÿ—ธ : โ€ข Credit Scoring Innovation
  • Independents led the charge, followed by some captives and finally banks
  • Third Party Originators (TPO)
  • TPOS were now accepted by banks
  • Creative Financing Structures & Large-Ticket Leasing FMV, PUT, 1st Amendment Leases and other creative leasing structures grew
  • Independent and captive leasing companies sought to distinguish themselves from the banks Synthetic Lease ๐Ÿ—ธ๐Ÿ—ธ : โ€ข Designed to be a loan for tax purposes, but an operating lease for accounting purposes โ€ข Still in existence today The NorVergence Program ๐Ÿ—ธ๐Ÿ—ธ : - Massive case of telecom equipment fraud withwidespread industry impact
  • There was a crowd mentality of credit, "If known better company X approves it, we should be able to as well"
  • The Hell or High-Water clause did not hold up in many jurisdictions because courts thought the equipment specialists should have known better
  • The equipment was worth 10% or less than the amount financed
  • Changed the concept of financing for services included in leases 2010 Consumer Financial Protection Bureau (CFPB) ๐Ÿ—ธ๐Ÿ—ธ : - created by the Dodd-Frank Wall Street Reform and Consumer Protection Act
  • Although designed to protect consumers, many laws are written to apply to smaller equipment financing transactions Equipment Lease Definition ๐Ÿ—ธ๐Ÿ—ธ : A transaction in which use and possession, but not title to tangible property, is transferred for consideration Government Leasing ๐Ÿ—ธ๐Ÿ—ธ : Three categories
  • Municipal leasing (1. taxing power; 2. police power; 3. power of "eminent domain")
  • Leases to the federal government government for
  • Lease to Native American tribes and nations
  • Does not involve financing, but accelerates the cash flow of the business in exchange funds to for a slight discount on the face value of the invoice
  • It's an off-balance sheet receivables method of financing
  • is not a loan and does not create debt to a company The Three Lenses for Examining Leases ๐Ÿ—ธ๐Ÿ—ธ : ะขax
  • IRS determines the eligibility for tax benefits (IRS Rev. Ruling 55-540)
  • "Tax Lease" or "Conditional Sales Contract"? Accounting
  • FASB determines eligibility (ASC 842, fka FASB 13)
  • Lessee: "Operating Lease" or "Finance Lease"
  • Lessor: "Operating Lease," "Sales-type Lease," or "Direct Financing Lease" Legal
  • UCC Articles 2, 2A and 9 - determine whether a transaction is a true lease and who owns the equipment
  • Proper handling of these filings perfects an interest in the asset and makes ownership known

Accounting Lens ๐Ÿ—ธ๐Ÿ—ธ : FINANCE LEASE

  • has the characteristics of a purchase agreement and meets any of the five criteria as set forth in ASC 842
  • requires LESSEE to record lease liability on the balance sheet at commencement; interest and amortization is expensed
  • LESSOR must capitalize the stream of pmts (show as lease receivable on the balance sheet); only take into come the portion of the payment applicable to interest. OPERATING LEASE
  • characteristics of a usage/rental agreement and meets NONE of the criteria set forth in ASC 842
  • requires LESSEE to record Right of Use Asset and Lease Liability on the bal sheet at commencement; lease expense to portion applicable to interest
  • LESSOR must record property as a fixed asset and record depreciation. All payments are taken into income Legal Lens ๐Ÿ—ธ๐Ÿ—ธ : UCC ARTICLE 9 :
  • governs any transaction that is not a lease but a secured transaction
  • UCC ARTICLE 2A

Often during a specified period during the contract Equipment Finance Agreement ๐Ÿ—ธ๐Ÿ—ธ : Agreement that resembles the structure of a finance lease, but provides for the lender to lend the borrower an amount for the purchase of the equipment typically, lender pays the vendor invoice and files a lien against the collateral Finance Lease ๐Ÿ—ธ๐Ÿ—ธ : * used in many forms

  • Frequently as a Net Lease - purpose of which is to financing the use of the property for the majority of its useful life.
  • typically used in reference to leases written by TPOs
  • often confusingly used to refer to a conditional sale in the form of a lease transation
  • is a specified lease classification type under ASC 842
  • Defined by UCC Article 2A
  • Lessor is not the mfg or supplier
  • Lessor does not select the equipment or lease from inventory of like items
  • Lessor makes sure the lessee is apprised of their rights against the seller with respect to warranties FMV Lease Option ๐Ÿ—ธ๐Ÿ—ธ : Provides that at the end of the lease contract, a determination is made for the assets then fair market value and the Lessee has the option to purchase it at for that amount. Note: normally a pure FMV is indicative of a true lease but the presence of the option does not ensure a finding that it is a true lease. Leveraged Lease ๐Ÿ—ธ๐Ÿ—ธ : Involves at a minimum, a lessee, lessor, and funding source from which the lessor borrows a significant portion of the cost of the equipment (20% or more throughout) Fair Market Value Lease (FMV) ๐Ÿ—ธ๐Ÿ—ธ : A lease which contains an option for the lessee to purchase the leased property at the end of the contract term for its then Fair Market Value (the price that a willing seller and buyer negotiate in an open marketplace) Managed Services (Contract Services)

๐Ÿ—ธ๐Ÿ—ธ : A non-tax lease or conditional sales contract in the guise of a lease, in which the title is intended to pass to the lessee at the end of the lease term Nominal Purchase Option ๐Ÿ—ธ๐Ÿ—ธ : Payment as a residual to the lease that is so minimal that the Lessee is extremely likely to exercise the option

  • Lessor is unlikely to have a "meaningful residual interest"
  • The Lessor's no residual interest in the asset at the end of the term is enough to recharacterize it as a secured sale or financing transaction rather than a true lease Other names for this type of lease
  • Nominal Purchase Option
  • $1.00 Buyout
  • Bargain Purchase Option
  • Buck Out
  • $1 Out
  • $101 Purchase Option Operating Lease ๐Ÿ—ธ๐Ÿ—ธ : Accounting term of a lease that fails to meet any of the ASC 842 criteria

Characteristics of a usage agreement. Non-Tax Lease ๐Ÿ—ธ๐Ÿ—ธ : Any lease in which the lessee is, or will become, the owner during or at the end of the lease term and is entitled to all the tax benefits of ownership Examples of leases which in substance is in fact one of the following

  • conditional sales contract
  • money-over-money transaction
  • purchase money security agreement
  • OR other lease intended as security agreement Purchase Upon Termination (PUT) ๐Ÿ—ธ๐Ÿ—ธ : Lessee agrees to buy and the lessor agrees to sell the equipment for a predetermined amount upon termination of the lease. Rental Agreement ๐Ÿ—ธ๐Ÿ—ธ : A short service lease; typically less than 12 months Sale-Leaseback

Therefore entitling the lessor to qualify for the tax benefits of ownership And the lessee to claim the entire amount of the lease rental as a tax deduction. IRS Revenue Ruling 55- 540 ๐Ÿ—ธ๐Ÿ—ธ : Defines what is NOT a lease for tax purposes: P (Payments > Rental): Rental payments are not substantially higher than rental value a fair the asset does not automatically A (Automatic Title): Ownership of pass to the lessee at the end of the term I (Interest): No portion of the lease payment is characterized as interest N (Nominal P.O.): The transaction does not include a nominal purchase option E (Equity) No portion of the lease payments can be applied to an equity position in the asset E (Excessive Payments): The amount paid under a short term lease is not a significant portion of the purchase price (excessive lease payments)

ASC 842

๐Ÿ—ธ๐Ÿ—ธ : From an accounting perspective, if any one of the FIVE following are true, then it is NOT a true lease / conditional sales contract

  • Title to the property automatically transfers to the lessee by or at the end of the lease term
  • The lease contains a bargain purchase option
  • The lease term is equal to or greater than 75% of the estimated economic life of the leased property
  • The present value of the minimum lease payments at the beginning of the lease term is equal to or greater than 90% of the fair market value of the property
  • The underlying asset is of a specialized nature Drivers of Equipment Financing & Leasing Industry ๐Ÿ—ธ๐Ÿ—ธ : FIVE:
  1. Economy
  2. cost, availability and variety of funding
  3. turnover of plant and machinery

*Ex: fleet vehicles, large medical (CT, MRI) construction, CNC, mfg, ag equipment Large-Ticket ๐Ÿ—ธ๐Ÿ—ธ : * transactions over $5,000,

  • sometimes referred to as "big ticket"
  • Ex: rail cars, aircraft, mfg, marine, energy equipment Lease ๐Ÿ—ธ๐Ÿ—ธ : generally defined as a transaction where a lender/lessor loans funds to a customer/lessee for a particular asset. The lessor retains ownership/title of the asset and transfers "possession in use" to the lessee for a specified term, after which the asset is returned to the lessor.