Mixed Deck — All CLFP Topics Flashcards

What is a 'flat payment' (level payment) lease structure?

Answer: A lease with equal periodic payments throughout the term, making budgeting easy for the lessee

A flat or level payment structure maintains the same payment amount each period, which simplifies lessee budgeting and is the most common payment structure in equipment leasing.

What is 'sale-leaseback' and what accounting issues does it raise?

Answer: A transaction where the owner sells an asset and immediately leases it back from the buyer, raising questions about whether a true sale occurred

In a sale-leaseback, the seller/lessee monetizes equity in an asset while retaining use; ASC 842 requires analysis of whether control was truly transferred to determine sale recognition.

What is a 'covenant lite' (cov-lite) structure in equipment financing?

Answer: A financing arrangement with few or no financial maintenance covenants, giving the borrower more flexibility

Cov-lite structures omit traditional financial maintenance covenants, reducing the lessor's ability to catch early warning signs of deteriorating credit but making deals more attractive to borrowers.

What does 'assignment without recourse' mean in equipment leasing?

Answer: The assignee (e.g., a bank) cannot seek payment from the assigning lessor if the lessee defaults

When a lease is assigned without recourse, the assignee takes on all credit risk and cannot look to the original lessor for payment if the lessee defaults.

Why is continuing education important for maintaining the CLFP designation?

Answer: It ensures that professionals stay updated on industry trends, regulations, and best practices.

Continuing education is paramount for maintaining the CLFP designation because the equipment leasing and finance industry is dynamic, with constant changes in regulations, market trends, and best practices. By requiring ongoing learning, the CLFP Foundation ensures that its certified professionals remain knowledgeable and competent. This continuous updating of skills and information allows CLFPs to provide the most current and effective advice, upholding the high standards of the designation.

What is Value of Leased Property?

Answer: The price at which the property could be sold at an arm's length transaction by unrelated parties. 1.) normal selling price, net volume discounts, for a lessor who manufacturer/dealer 2.) Cost, net volume discounts for a lessor that is note a manufacturer or dealer.

The Value of Leased Property refers to the fair market value of the asset at the commencement of the lease. This value is determined by the price at which the property could be sold in an arm's length transaction between unrelated parties. For a manufacturer or dealer lessor, it's the normal selling price, while for other lessors, it's typically the cost of the asset.

How should a Lessor account for an Operating Lease on its income statement?

Answer: Rental income is recognized on operating leases in the period the payment is a receivable. If payments are not level (increasing or decreasing) they are recorded on a straight-line basis unless the alternative payment is more representative of property usage

For an operating lease, the lessor retains the risks and rewards of ownership of the leased asset. Consequently, the lessor recognizes rental income over the lease term, typically on a straight-line basis, as the asset is used by the lessee. This accounting method reflects the ongoing service provided by the lessor rather than a sale of the asset.

What is the 'implicit rate' (or lessor's rate) in a lease transaction?

Answer: The internal rate of return that equates the present value of all lease payments and residual value to the equipment's fair value

The implicit rate is the lessor's yield on the transaction, calculated as the IRR that discounts all cash inflows (payments + residual + tax benefits) back to the equipment cost.

The Equal Credit Opportunity Act (ECOA) prohibits equipment lessors from discriminating against credit applicants based on:

Answer: Race, color, religion, national origin, sex, marital status, or age

ECOA prohibits creditors, including equipment lessors, from discriminating against applicants on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.

What is a 'guaranty' from a parent company in equipment leasing?

Answer: A legal commitment by the parent to pay the subsidiary's lease obligations if the subsidiary defaults

A parent company guaranty provides the lessor with recourse to a stronger credit (the parent) if the lessee subsidiary fails to meet its payment obligations.

In a lease agreement, what does a 'financial covenants' section require?

Answer: The lessee to maintain specified financial ratios or conditions throughout the lease term

Financial covenants require the lessee to maintain specific financial metrics (e.g., debt-to-equity ratio, minimum liquidity) as a condition of keeping the lease in good standing.

What is an 'evergreen' lease clause?

Answer: A provision that automatically renews the lease unless proper notice is given to terminate

An evergreen clause automatically renews a lease for successive periods unless the lessee provides timely written notice of intent to terminate or return the equipment.

What does 'global cash flow analysis' mean in underwriting?

Answer: Analyzing cash flow from all entities and individuals (business + guarantors) to assess total repayment capacity

Global cash flow analysis combines the business's cash flow with the personal finances of guarantors to get a complete picture of total debt service capacity.

What is 'adverse selection' in the equipment finance industry?

Answer: The tendency for higher-risk borrowers to seek financing more aggressively, skewing a portfolio toward riskier credits

Adverse selection occurs because high-risk borrowers who can't get credit elsewhere pursue every financing option, potentially causing a lessor's portfolio to attract disproportionately risky customers.

What is a 'leveraged lease' from a tax and accounting perspective?

Answer: A lease in which the lessor uses debt (typically 60-80% of equipment cost) from a third-party lender to fund the transaction, with the lessor owning the equipment and claiming tax benefits

In a leveraged lease, the lessor invests only 20-40% equity, borrows the rest on a non-recourse basis, and claims 100% of the tax benefits (depreciation) while the lender has first lien on the equipment and rents.

What is 'cash flow from operations' (CFO) and why is it the most important financial statement metric for lease underwriters?

Answer: CFO is the cash generated by core business operations, and it directly shows whether a lessee can fund lease payments without relying on asset sales or new debt

CFO excludes financing and investing activities, showing the true cash-generating power of the business that will ultimately service the lease obligation.

Which financial ratio is most commonly used to assess a lessee's ability to service debt from operating cash flow?

Answer: Debt Service Coverage Ratio (DSCR)

DSCR measures net operating income divided by total debt service, indicating whether the lessee generates enough cash flow to cover its payment obligations.

What is the 'money factor' in equipment leasing?

Answer: A decimal number used to calculate the finance charge portion of a lease payment

The money factor is a small decimal (e.g., 0.00250) that represents the finance charge in a lease; multiplied by 2,400 it approximates the equivalent annual interest rate.

What is a 'synthetic lease' primarily designed to accomplish?

Answer: Provide off-balance-sheet treatment for the lessee under older accounting rules while qualifying as a loan for tax purposes

A synthetic lease was structured to be an operating lease for GAAP (keeping debt off the balance sheet) but a loan for tax purposes, allowing the lessee to claim depreciation deductions.

What is 'charge-off' in the context of a lease portfolio?

Answer: The removal of an uncollectible lease receivable from the books as a loss after recovery efforts are exhausted

A charge-off is the accounting write-off of a lease receivable deemed uncollectible, recognized as a realized loss net of any recovered amounts.