CLFP Lease Structuring & Pricing 2 — Questions and Answers
Question 1: What is a 'fair market value' (FMV) lease and how does it differ from a $1 buyout lease?
- 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 (Correct answer)
- An FMV lease has no purchase option; a $1 buyout has no residual value
- An FMV lease always has a longer term than a $1 buyout
- An FMV lease is only available for real estate, not equipment
Correct 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.
Question 2: What does 'spread over cost of funds' mean in lease pricing?
- The difference between the lease's yield and the lessor's cost to borrow money, representing the gross margin on the transaction (Correct answer)
- The range of interest rates offered across different credit tiers
- The fee charged to cover documentation and origination costs
- The gap between the list price and the actual equipment cost
Correct 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.
Question 3: What is 'rate card pricing' in small-ticket equipment leasing?
- A standardized pricing grid that assigns lease rates (as a percentage of equipment cost) based on term and credit tier, without individual deal analysis (Correct answer)
- A credit card with special rates for equipment purchases
- A pricing list published by industry associations
- A variable rate tied to the prime rate index
Correct 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.
Question 4: What is a 'lease rate factor' (LRF)?
- A decimal multiplied by the equipment cost to calculate the periodic payment amount (Correct answer)
- The interest rate on a lease expressed as an annual percentage
- The factor by which residual value is discounted
- The ratio of hard costs to soft costs in a lease
Correct 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.
Question 5: How does 'advance payment' (first payment in advance) affect the lessor's yield compared to 'payments in arrears'?
- Advance payments increase the lessor's yield because the lessor receives money sooner, improving the time value of cash flows (Correct answer)
- Advance payments decrease the yield because the lessee pays more total interest
- Advance payments have no effect on yield
- Advance payments reduce yield because funding costs are higher
Correct 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.
Question 6: What is a 'step-down' payment structure in equipment leasing?
- A lease where payments start higher and decrease at predetermined intervals over the term (Correct answer)
- Payments that decrease each month by a fixed dollar amount
- A structure where each payment is lower than the prior by 10%
- A lease that automatically reduces payments after 12 months of on-time payment
Correct 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.
CLFP Lease Structuring & Pricing 2
What is a 'fair market value' (FMV) lease and how does it differ from a $1 buyout lease?