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Lease classification

Criteria Analysis
Lease term is for the major part of the remaining The lease term is 10 years. The five 5-year
economic life of the asset renewal options available to Lessee Corp are
not reasonably certain of exercise (at lease
commencement) because the renewal options
require rent to be reset to market rates when
exercised. Therefore, Lessee Corp is utilizing
the asset for 25% of the economic life of the
asset (10-year lease / 40-year economic life),
which is not deemed to be a major part.
Sum of present value of lease payments and any The lease payments net of the incentive Lessor
residual value guarantee by the lessee amounts to Corp pays Lessee Corp are $5,531,940 (see
substantially all of the fair value of the underlying below for a schedule of payments). The present
asset value of the lease payments (discounted at the
rate Lessor Corp charges in the lease of
approximately 9.04%) is $3,737,510.
Because the purchase option is reasonably
certain of being exercised, it should be included
as a lease payment at the end of the lease term.
Using the 9.04% rate Lessor Corp charges
Lessee Corp, the present value of the purchase
option is $1,262,490.

Therefore, the present value of the lease
payments represents 100% of the fair value of
the leased asset (($3,737,510 +
$1,262,490)/$5,000,000).
Specialized nature Although the property is in a specific location, it
could be used by another party without major
modifications.

The following table shows the schedule of lease payments.

Date Amount

Year 1 500,000
Year 2 (515,000 – 200,000 lease incentive) 315,000
Year 3 530,450
Year 4 546,364

Year 5 562,754
Year 6 579,637
Year 7 597,026

Year 8 614,937
Year 9 633,385
Year 10 652,387
Total $5,531,940

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