Thread: Deferred rent liability classification

Disguised Sales And Leases

Remember Leases are not classified as liabilities if capitalized for term
exceeding (a number I forget). Example: lease payments in NY for building
with 99 year lease, 98 years paid in advance qualify as sale. You may
expense , if necessary, or treat as a category of sale liken to car loan.

Above example egregious?
NY Townhouse with 30 year lease, 10 years prepaid may qualify as sale for
tax AND ledger accounting.

Treatment chosen by a lessee is governed by state law & the UCC.
Long term leases are not always "leases", they may be securities, or, estates in property.

Lessee with prepaid long-term "rent" may be required to record lease as asset with
maintenance expenses.

"Merely affixing a label to a transaction is not dispositive." Poster remarks the contract is
in the nature of a long term lease ["long term portion of deferred rent liability"].
Deferred rent liability may trigger conversion of interest to an estate in property (gift tax liability?).

To wit:
"There are certain timeless struggles in this existence. Good versus evil. Man against
nature. Mets versus Yankees.

True Lease
And of particular interest to this readership is the epic battle of "true lease versus
security interest." The conflict between secured lenders and competing parties over
what constitutes a valid and enforceable security interest and not a true leasehold
has occupied many commentators..."
http://www.allbusiness.com/business-.../974246-1.html

[UCC] "Section 1-201(37) are set out in the disjunctive. The presence of any
characteristic listed in the former will create a security interest where a lease may
have been intended, while the mere presence of the provisions catalogued in the
latter will not necessarily convert an intended lease into a security interest."
http://findarticles.com/p/articles/m...21343837/pg_2/

Concluding
Long-term lease (or deferred rent) may not constitute "rent" for balance sheet
or I/E calculation. Consider a prepaid 20 year lease on a company auto with
a depreciation schedule of less than 10 years. Is the auto a leased vehicle or property
listed on balance sheet similar to prepaid insurance? Answer, it depends.

University of Iowa (The Journal of Corporation Law)
The Journal of Corporation Law
COMMENT: The Continuing Debate Regarding the Lease Versus Disguised Security Interest
24 Iowa J. Corp. L. 169
Excerpt

I. Introduction

Companies that engage in lease transactions need to be aware of how to structure
their contracts to avoid the risk of courts later finding their leases to be disguised
security agreements. Since the extensive revision of Uniform Commercial Code (U.C.C.)
section 1-201(37) in 1987, companies now have a list of criteria courts look to in
determining whether a transaction is a true lease or a disguised security agreement.
Although the revised section 1-201(37) was intended to clarify the lease versus security
interest issue, this issue continues to be one of the most litigated issues under the
U.C.C. 1