CLP Lease Origination and Structure 1 — Questions and Answers
Question 1: Which of the following is a characteristic of a Fair Market Value (FMV) lease?
- The asset automatically transfers to the lessee at lease end.
- The lessee pays a fixed price for the asset at lease end.
- The lessee can buy the asset at its fair market value. (Correct answer)
- The lease requires full payment upfront.
Correct answer: The lessee can buy the asset at its fair market value.
An FMV lease allows the lessee to purchase the asset at its fair market value at the end of the lease term, offering flexibility.
Question 2: What does the term 'residual value' refer to in lease structuring?
- The interest paid on the lease.
- The depreciation of the asset.
- The upfront cost paid by the lessee.
- The asset’s value at the end of the lease term. (Correct answer)
Correct answer: The asset’s value at the end of the lease term.
Residual value is the estimated worth of the asset at the end of the lease, which affects monthly payment calculations.
Question 3: In lease documentation, what is the primary purpose of the 'hell or high water' clause?
- To allow early termination without penalty.
- To protect the lessee against equipment failure.
- To guarantee uninterrupted payments by the lessee. (Correct answer)
- To define end-of-term purchase rights.
Correct answer: To guarantee uninterrupted payments by the lessee.
This clause ensures that the lessee must continue lease payments regardless of issues with the leased asset.
Question 4: Which party typically retains ownership of the asset during the term of a true lease?
- The lessee
- The lessor (Correct answer)
- The lender
- The guarantor
Correct answer: The lessor
In a true lease, the lessor retains ownership and the lessee has usage rights only for the lease duration.
Question 5: What type of lease includes a guaranteed purchase price at the end of the term?
- FMV lease
- Operating lease
- $1 buyout lease (Correct answer)
- Step-up lease
Correct answer: $1 buyout lease
A $1 buyout lease includes a fixed purchase price of $1, indicating transfer of ownership is expected.
Question 6: Which of the following best defines a step lease?
- A lease with fixed monthly payments.
- A lease with irregular payment timing.
- A lease with payments that increase or decrease over time. (Correct answer)
- A lease where all payments are due at the start.
Correct answer: A lease with payments that increase or decrease over time.
A step lease has periodic payment increases or decreases, making it suitable for companies with changing cash flows.
CLP Lease Origination and Structure 1
Which of the following is a characteristic of a Fair Market Value (FMV) lease?