What does the term 'lessee's equity' refer to?

The term 'lessee's equity' refers specifically to the value of the lessee's interest in a leased asset. This concept signifies the portion of the asset that the lessee essentially owns or how much value they have built up in the asset over the course of the lease. It is derived from the difference between the asset's current market value and the obligations the lessee has under the lease agreement.

In leasing arrangements, the lessee may invest in improvements to the asset, or the asset might appreciate in value over time, thereby increasing the lessee's equity. This equity can be particularly relevant at the end of the lease term when the lessee may have the option to purchase the asset, as it represents a financial interest in that decision.

Other options focus on different aspects of the leasing agreement, such as total lease payments made or obligations of the lessor, which do not capture the concept of equity the lessee holds in the leased asset itself.