A fee is payment for a service as compensation for costs, typically expressed in basis points (bp), with 1 bp equal to one hundredth of one percent (0.01%). Income that is generated by services not directly involved in the provision of financing (e.g., documentation, credit searches and asset remarketing) is fee income.
| Flow of Lease Fees, MLPs and Purchase Price |
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A nonrefundable fee required by the lessor at the time a lessee accepts a commitment in order for the lessor to allocate the funds required for the lease and to lock in a specific lease rate and other terms is a commitment fee. After entering into the lease agreement, however, lessees occasionally reconsider the asset purchase and cancel the lease rather than proceed with the transaction. If a lease that has been arranged is not used by the intended lessee, the full fee is generally kept by the leasing company. Where the asset has actually been purchased and delivered, the commitment fee usually reduces the first and subsequent rentals.
Other fees that lessees are commonly charged at origination include:
- Application fee – A fee charged for the processing of a lease application;
- Administration fee – A fee the leasing company charges the lessee for lease-related administration costs; and
- Origination fee – A fee paid to a third party for a referral or brokering a transaction.
A lease may also allow the lessor to charge the lessee such fees as:
- Extension fee – A charge paid by the lessee for the lessor’s forgiving a monthly rent in return for the lessee’s commitment to pay it at a later date;
- Late fee – A fee charged the lessee by the lessor for a payment not made or made after the contractual due date and earned from the payment due date until the payment is made;
- Remarketing fee – A charge for selling or leasing a leased asset to another party upon termination of the original lease; and
- Early termination penalty – A charge set at lease inception and levied against the lessee in the event of early lease termination in order to assure recovery of the lessor’s remaining investment in the lease, it equalling the present value of the remaining lease payments discounted using the lessee’s incremental borrowing rate at lease inception.