Lease Structuring & Pricing Flashcards

What is a 'fair market value' (FMV) lease and how does it differ from a $1 buyout lease?

Answer: An FMV lease allows the lessee to purchase the equipment at its then-current market value at lease end, with lower payments due to a meaningful residual; a $1 buyout transfers ownership for $1

FMV leases carry meaningful residual value assumptions, generating lower payments but leaving the lessee with price uncertainty at lease end; $1 buyouts transfer ownership but have higher payments.

What does 'spread over cost of funds' mean in lease pricing?

Answer: The difference between the lease's yield and the lessor's cost to borrow money, representing the gross margin on the transaction

The spread is the profit margin in basis points between what the lessor earns on a lease and what it costs to fund that lease, covering credit risk, overhead, and profit.

What is 'rate card pricing' in small-ticket equipment leasing?

Answer: A standardized pricing grid that assigns lease rates (as a percentage of equipment cost) based on term and credit tier, without individual deal analysis

Rate cards provide instant, automated pricing for small-ticket deals by looking up the appropriate lease rate factor based on equipment cost, term, and the applicant's credit tier.

What is a 'lease rate factor' (LRF)?

Answer: A decimal multiplied by the equipment cost to calculate the periodic payment amount

The LRF is a decimal (e.g., 0.02200) that, when multiplied by the equipment cost, gives the monthly payment; it incorporates the interest rate, term, and any residual value.

How does 'advance payment' (first payment in advance) affect the lessor's yield compared to 'payments in arrears'?

Answer: Advance payments increase the lessor's yield because the lessor receives money sooner, improving the time value of cash flows

Receiving the first payment at signing rather than a month later shortens the payback period and increases the lessor's IRR for the same payment amount and term.

What is a 'step-down' payment structure in equipment leasing?

Answer: A lease where payments start higher and decrease at predetermined intervals over the term

Step-down structures front-load higher payments that decrease over time, benefiting lessees who want to maximize early cash flow as equipment depreciates and becomes less critical.