Initial Direct Cost (IDC) includes which costs?

Initial Direct Cost (IDC) includes which costs?

• A. Costs incurred by the lessor to originate the lease in transactions with independent third parties that are required and would have occurred regardless of leasing.
• B. Interest costs on borrowed funds used to originate the lease.
• C. Administrative costs not directly related to the lease origination.
• D. Costs incurred by the lessor to originate the lease with independent third parties that would have occurred regardless of leasing and certain other costs incurred by the lessor.

Answer: (D)

Initial Direct Costs are the incremental costs that are directly attributable to negotiating and authorizing a lease and would not have been incurred if the lease had not been executed. They include costs tied to obtaining the lease from independent third parties (such as commissions or fees paid to brokers and other professionals) that are incurred specifically to originate the lease, plus other directly related costs the lessor incurs for origination. Financing costs (like interest) and general administrative costs not tied to the lease, or costs that would have occurred anyway regardless of leasing, are not included. That’s why the option describing costs incurred to originate the lease with independent third parties that are directly tied to obtaining the lease and other directly attributable origination costs best matches IDC.

Initial Direct Costs are the incremental costs that are directly attributable to negotiating and authorizing a lease and would not have been incurred if the lease had not been executed. They include costs tied to obtaining the lease from independent third parties (such as commissions or fees paid to brokers and other professionals) that are incurred specifically to originate the lease, plus other directly related costs the lessor incurs for origination. Financing costs (like interest) and general administrative costs not tied to the lease, or costs that would have occurred anyway regardless of leasing, are not included.

That’s why the option describing costs incurred to originate the lease with independent third parties that are directly tied to obtaining the lease and other directly attributable origination costs best matches IDC.