Question
From: (redacted)
Sent: Thursday, December 22, 2005 10:50 AM
To: Verne,B. Michael
Subject: Questionabout lease transaction
Hi Mike:
I'm looking atan acquisition of assets coupled with a long-term (20 years) lease of non-exemptreal property assets. The deal has the following elements:
1) at closing(year 1), the purchaser will pay about $2.6 million for the operating assets ofa business located on the real property;
2) at closing,the purchaser will pay $15 million for an option, which gives the buyer theright to buy the real property in year 20 for $53 million;
3) over the 20years following closing, the purchaser will lease the real property and makelease payments to the seller of $375,000/month ($90 million over the term ofthe lease -- this rate may be below the rate that the tenant could haveobtained if the upfront option payment were not part of the overall deal); and
4) at the end ofthe lease term, buyer may (but is not required to) exercise the option (describedin 2) above) to acquire the real property by payment to the seller of the $53million negotiated in that option.
I'd like toconfirm that the transaction elements set forth above do NOT give rise to anyobligation to file a Notification and Report Form because, taken together, thenon-exempt elements do not meet the size of transaction test: (a) the operatingassets and the option together would be valued at $17.6 million, well below the$53.1 million threshold; (b) the lease payments are at market rate (taking intoaccount the initial $15 million buy down of the rate); and (c) the finalpurchase of the real property, if exercised, would be below the filingthreshold as well (which will no doubt be higher in 2025 than the $53.1 millionminimum we use today) and would not be aggregated with the initial purchase ofthe operating assets and option.
I've paused onthis a bit because there is some thought that the lease may be accounted for asa capital lease, and while operating leases are not reportable, the status ofcapital leases under the HSR rules is less clear, and seem to hingeon whether beneficial ownership of the property is transferred to the lessee asa result of the lease. The following facts, I believe, are relevant to thisanalysis.
(u) The deallawyers tell me that the lease is not intended to be an installment salearrangement or a financing lease, but instead is
intended as atrue lease.
(v) Title willremain with the seller throughout the lease term.
(w) Buyer is notrequired to make the final purchase in year 20, but may walk away.
(x) The proposed$53 million purchase price suggests to me that the leased property will nothave exhausted its useful life by the end of the lease term.
(y) Thedocuments for this transaction have not yet been fully negotiated, and so thequestion of who will bear the risk of loss during the lease term is an openitem. I would not be surprised if the risk of loss were to be determined bymandatory minimum insurance requirements on the property and on the operationof the business (many commercial leases have such provisions), but this has notbeen finally decided.
(z) The buyerwill pay all taxes and make all repairs and improvements required for the leasedproperty during the lease term, on terms customary for a triple net lease.
I would concludethat the seller retains the beneficial ownership of the property up until thedate the option is exercised (if it ever is), and that, for HSR purposes, the lease payments should be excluded from the 2005calculation of the value of the deal. As a result, none of the transactionelements, alone or in the aggregate, will give rise to a notificationobligation.
Mike, I'm aroundtoday and tomorrow, and pretty much of all of next week. Please give me a callor send me an email to confirm my conclusions and/or to discuss. My contactinformation follows.