(go to previous page) (go to beginning)
If the transaction qualifies as an operating lease, a sale is recorded; the property and related liabilities are removed from the seller's balance sheet; the gain or loss is recorded and amortized in proportion to the related gross rent charged; and the leaseback is classified according to FASB rules.
Further, for the lease to be considered an operating lease, answers to the following four questions must be no:
Does property-ownership transfer from the buyer to the seller at the end of the lease?
Does the lease contain a bargain-purchase or bargain-renewal option that is substantially less than fair market value or fair market rates?
Does the lease term, including its renewal options, equal or exceed 75 percent of the real estate's estimated economic life?
Is the present value of the minimum lease payments at the beginning of the lease term (excluding executory costs) greater than or equal to 90 percent of the real estate's fair market value?
There are other criteria that sellers and buyers must keep in mind in a sale-leaseback transaction, as well. First, subleasing of a certain portion of a property is allowed. It must be limited to a minor amount, however -- typically defined as the present value of the rents from the sublease being less than 10 percent of the fair value of the property at the date of the sale-leaseback transaction.
Also, the seller must pay the rent payment, which may include fixed rent and contingent rentals that are based on the seller's future operations. The sales terms must also provide for a transfer of all ownership risks and rewards from the seller to the buyer.
Further, for the buyer, the leased property shall be reported in the balance sheet and depreciated following the buyer's normal depreciation policy. Rent shall be reported as revenue over the lease term, and initial direct costs shall be deferred and allocated over the lease term in proportion to the recognition of rental income.
If, at the start of the lease, the property's fair value is less than its cost or carrying amount, then a loss equal to that difference shall be recorded.
There are further stipulations and requirements according to the FASB statements as related to buyers' and sellers' roles in sale-leaseback transactions. The statements can be viewed online (www.fasb.org/st/).
Timing the transaction
Sellers often wait until their companies desperately need cash before they consider a sale-leaseback transaction. This is a mistake, however, because at such times, the company's financial statements often start showing signs of weakness. Therefore, it may be difficult or impossible to find a buyer who will offer an attractive price.
In the current economic crisis, the limited availability of capital creates incentives for sale-leasebacks, especially for creditworthy corporations.
Further, buyers may stipulate in the contract that a condition of closing is that there has not been any significant change in the seller's financial condition between the time of entering into the contract and closing.
* * *
If structured carefully and correctly, a sale-leaseback transaction can be an effective and cost-beneficial means of financing. Sellers and buyers also can realize many other potential benefits. Mortgage brokers who understand these transactions and their benefits can best help their clients.
Further, representatives on both sides of a sale-leaseback transaction must be intimately familiar with the accounting requirements, as well as the complexities of sale and lease agreements. It is beneficial to have experienced real estate brokers and accounting professionals involved to ensure these transactions' success.
Anna N. Lee,
an investment broker with Colliers International, is an expert in property-valuation, operating-cost reduction and sale-leaseback transactions. Previously, Lee has been a certified public accountant, a university accounting professor, a hospital chief financial officer, a banker and a commercial mortgage adviser. She is a public speaker, trainer and co-author of Commercial Real Estate Investment Tools, available at Amazon.com. Visit www.ColliersParrish.com/ALee or contact Lee at (925) 279-4635 or ALee@ColliersParrish.com.
Page: 1 2 3 Previous