Initial Direct Costs

Definition: Initial Direct Costs are incremental costs of a lease that would not have been incurred had the lease not been obtained, such as broker commissions…

Initial Direct Costs are incremental costs of a lease that would not have been incurred had the lease not been obtained, such as broker commissions, legal fees directly tied to lease execution, and consideration paid to existing tenants to vacate. Under ASC 842 the lessee adds Initial Direct Costs to the initial measurement of the Right-of-Use Asset; the lessor capitalizes them in the lease investment for direct financing/sales-type leases or expenses them for operating leases.