Leasing

On January 1, 2019, we adopted the amendments to the lease accounting principles. Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information.

Ally as the Lessee

We have operating leases for our corporate facilities, which have remaining lease terms of 6 months to 13 years. Most of the property leases have fixed payment terms with annual fixed-escalation clauses and include options to extend the leases for periods that range from 1 to 15 years. Some of those lease agreements also include options to terminate the leases in periods that range from 2 to 5 years after the commencement of the leases. We have not included any of these term extensions or termination provisions in our estimates of the lease term, as we do not consider it reasonably certain that the options will be exercised. Our property-lease agreements contain a lease component, which includes the right to use the real estate, and non-lease components, which include utilities and common area maintenance services. Lease components are accounted for under the ASC Topic on Leases, while non-lease components are accounted for under other GAAP Topics. We elected the practical expedient to account for the lease and non-lease components for property leases as a single lease component. Additional variable-rent payments made during the lease term are not based on a rate or index and are excluded from the calculations of ROU assets and lease liabilities and recognized as a component of variable lease expense as incurred.

We also have operating leases for a fleet of vehicles that is used by our sales force for business purposes, with noncancellable lease terms of 367 days. Thereafter, the leases are month-to-month, up to a maximum of 48 months from inception. In addition to lease costs related to the vehicles, the lease contracts include non-lease components such as maintenance, fuel, and administrative services. We elected to account for the lease and non-lease components separately. As a result, the non-lease components are excluded from the calculation of the ROU asset and lease liability and are recognized as other operating expenses as incurred.

The following table details our total investment in operating leases.



($ in millions)	March 31, 2019		January 1, 2019 (a)
Assets
Operating lease right-of-use assets (b)	$	177	$	161
Liabilities
Operating lease liabilities (c)	$	206	$	190


(a)	Date of adoption.


(b)	Included in other assets on our Condensed Consolidated Balance Sheet.


(c)	Included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet.

During the three months ended March 31, 2019, we paid $12 million in cash for amounts included in the measurement of lease liabilities at March 31, 2019. This amount is included in net cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. During the three months ended March 31, 2019, we obtained $27 million of ROU assets in exchange for new operating lease liabilities. As of March 31, 2019, the weighted-average remaining lease term of our operating lease portfolio was 7 years, and the weighted-average discount rate was 2.98%.

The following table presents future minimum rental payments we are required to make under operating leases that have commenced as of March 31, 2019, and that have noncancellable lease terms expiring after March 31, 2019.



($ in millions)
2019	$	36
2020	46
2021	36
2022	24
2023	16
2024 and thereafter	71
Total undiscounted cash flows	229
Difference between undiscounted cash flows and discounted cash flows	(23		)
Total lease liability	$	206

In addition to the above, we entered into a forward-starting lease agreement in September 2017, for a new corporate facility in Charlotte, North Carolina, where we plan to consolidate several existing facilities into that location. The lessor and their agents are currently constructing the facilities at this location, with the lease scheduled to commence in April 2021 after construction is completed. The lease agreement will have a total of $290 million in undiscounted future lease payments over the 15 year term of the lease.

Future minimum rental payments required under operating leases as of December 31, 2018, prior to the date of adoption and as defined by the previous lease accounting guidance, with noncancellable lease terms expiring after December 31, 2018, were as follows.



Year ended December 31, ($ in millions)
2019	$	48
2020	47
2021	46
2022	37
2023	31
2024 and thereafter	294
Total minimum payments required	$	503

The following table details the components of total net operating lease expense.



	Three months ended March 31,
($ in millions)	2019		2018
Operating lease expense	$	11	$	10
Variable lease expense	2		2
Total lease expense, net (a)	$	13	$	12


(a)	Included in other operating expenses in our Condensed Consolidated Statement of Comprehensive Income.

Ally as the Lessor

Investment in Operating Leases

We purchase consumer operating lease contracts and the associated vehicles from dealerships after those contracts are executed by the dealers and the consumers. The amount we pay a dealer for an operating lease contract is based on the negotiated price for the vehicle less vehicle trade-in, down payment from the consumer, and available automotive manufacturer incentives. Under the operating lease, the consumer is obligated to make payments in amounts equal to the amount by which the negotiated purchase price of the vehicle (less any trade-in value, down payment, or available manufacturer incentives) exceeds the contract residual value (including residual support) of the vehicle at lease termination, plus operating lease rental charges. The customer can terminate the lease at any point after commencement, subject to additional charges and fees. Both the consumer and the dealership have the option to purchase the vehicle at the end of the lease term, which can range from 24 to 60 months, at the residual value of the vehicle, however it is not reasonably certain this option will be exercised and as such our consumer leases are classified as operating leases. We have made an accounting policy election to exclude the sales taxes we collect from consideration in the lease contract and from variable lease payments not included in contract consideration. In addition to the charges described above, the consumer is generally responsible for certain charges related to excess mileage or excessive wear and tear on the vehicle. These charges are deemed variable lease payments and, as these payments are not based on a rate or index, they are recognized as net depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income as incurred.

When we acquire a consumer operating lease, we assume ownership of the vehicle from the dealer. We require that property damage, bodily injury, collision, and comprehensive insurance be obtained by the lessee on all consumer operating leases. Neither the consumer nor the dealer is responsible for the value of the vehicle at the time of lease termination. When vehicles are not purchased by customers or the receiving dealer at scheduled lease termination, the vehicle is returned to us for remarketing. We generally bear the risk of loss to the extent the value of a leased vehicle upon remarketing is below the expected residual value. At contract inception, we determine pricing based on the projected residual value of the leased vehicle. This evaluation is primarily based on a proprietary model, which includes variables such as age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and shifts in used-vehicle supply. This internally-generated data is compared against third-party, independent data for reasonableness. Periodically, we revise the projected value of the leased vehicle at termination based on current market conditions and adjust depreciation expense if necessary over the remaining life of the contract. At termination, our actual sales proceeds from remarketing the vehicle may be higher or lower than the estimated residual value resulting in a gain or loss on remarketing, which is included in net depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income. Excessive mileage or excessive wear and tear on the vehicle during the lease may impact the sales proceeds received upon remarketing. As of March 31, 2019, consumer operating leases with a carrying value, net of accumulated depreciation, of $394 million were covered by a residual value guarantee of 15% of the manufacturer’s suggested retail price.

The following table details our investment in operating leases.



($ in millions)	March 31, 2019			December 31, 2018
Vehicles	$	9,903		$	9,995
Accumulated depreciation	(1,564		)	(1,578		)
Investment in operating leases, net	$	8,339		$	8,417

The following table presents future minimum rental payments we have the right to receive under operating leases with noncancellable lease terms expiring after March 31, 2019.



($ in millions)
2019	$	1,024
2020	933
2021	402
2022	57
2023	5
2024 and thereafter	—
Total lease payments from operating leases	$	2,421

We recognized $361 million and $382 million in operating lease revenue for the three months ended March 31, 2019, and March 31, 2018, respectively. Depreciation expense on operating lease assets includes remarketing gains and losses recognized on the sale of operating lease assets. The following table summarizes the components of depreciation expense on operating lease assets.



	Three months ended March 31,
($ in millions)	2019			2018
Depreciation expense on operating lease assets (excluding remarketing gains)	$	261		$	291
Remarketing gains, net	(15		)	(18		)
Net depreciation expense on operating lease assets	$	246		$	273

Finance Leases

Our total gross investment in finance leases, which is included in finance receivables and loans, net, on our Condensed Consolidated Balance Sheet was $481 million and $439 million as of March 31, 2019, and December 31, 2018, respectively. This includes lease payment receivables of $465 million and $425 million and unguaranteed residual assets of $16 million and $14 million, respectively, as of March 31, 2019, and December 31, 2018. Interest income on finance lease receivables was $6 million for both the three months ended March 31, 2019, and March 31, 2018, and is included in interest and fees on finance receivables and loans in our Condensed Consolidated Statement of Comprehensive Income.

The following table presents future minimum rental payments we have the right to receive under finance leases with noncancellable lease terms expiring after March 31, 2019.



($ in millions)
2019	$	110
2020	139
2021	134
2022	67
2023	38
2024 and thereafter	29
Total undiscounted cash flows	517
Difference between undiscounted cash flows and discounted cash flows	(52		)
Present value of lease payments recorded as lease receivable	$	465