USA Land lease expense - HELP!

[maurem76]

Here is the scenario:

I work in banking (don't judge ). A potential customer wants to build a medical office building on the property of an existing hospital. The customer set up a single asset LLC ("LLC") to own a medical office building. The hospital does not want to sell any land. Therefore, the LLC entered into a land contract with a hospital. The land contract requires a one time payment of $150,000 to be paid no later than 4 days after both parties sign the final land contract. The term of the land contract is 40 years.

I will be lending funds to the LLC. I will require annual tax returns to verify cash flow and test covenants. How will I see the land contract expense in the tax return? I'm guessing that I will see an expense of $3,750 annually; however, will it show up as "lease/rent" or "amortization expense"?

Any help is greatly appreciated.

 

[The Finance Writer]

Because lease accounting is one of the most contentious issues in the accounting field -- and proposed rule changes are forthcoming -- your question is challenging. I believe the land lease should be a capitalized asset, which means the cost will appear as amortization expense over the lease term. However, I'm eager to see the other responses you receive to this question.

 

[Capital]

Here is the scenario:

I work in banking (don't judge ). A potential customer wants to build a medical office building on the property of an existing hospital. The customer set up a single asset LLC ("LLC") to own a medical office building. The hospital does not want to sell any land. Therefore, the LLC entered into a land contract with a hospital. The land contract requires a one time payment of $150,000 to be paid no later than 4 days after both parties sign the final land contract. The term of the land contract is 40 years.

I will be lending funds to the LLC. I will require annual tax returns to verify cash flow and test covenants. How will I see the land contract expense in the tax return? I'm guessing that I will see an expense of $3,750 annually; however, will it show up as "lease/rent" or "amortization expense"?

Any help is greatly appreciated.

it will show up in d lease rental, all expenses has been accumulated in d rental

 

[Counterofbeans]

What exactly happens at the end of 40 years? I'm guessing there is no transfer of ownership or BPO, yes?

Unless there is some extraordinary fact that I'm missing, there's no question that it's an asset. Assuming that the rights to the land cease at the end of 40 years, some sort of systematic and rational allocation of the $150,000 should be expensed into the P&L on a monthly basis. As far as what to technically call this expense, I'd take a look at the contract language first, then go from there.

 

[maurem76]

The hospital owning the land is required to purchase the building at the conclusion of the 40 year lease. The hospital also has an option to purchase the building after 20 years.

The contract is silent on the classification of the expense.

 

[Counterofbeans]

The hospital owning the land is required to purchase the building at the conclusion of the 40 year lease. The hospital also has an option to purchase the building after 20 years.

The contract is silent on the classification of the expense.

Is there any incentive for the hospital for purchase the building prior to the 40 year anniversary? If so, or if it becomes probable that they will do such prior to the 40th anniversary, you would likely want to revise the estimate of 40 years and expense the remaining NBV (Net Book value) over such shorter period.

Also, is there anything else related to this contract or is it as basic as renting the land for $150k and that's it? Stated another way, are there any other cash flows (or potential cash flows) described in the contract?

Insofar as the contract is concerned, yes, I agree that the contract isn't likely to define how accounting should classify the expense. What I'm referring to is that the contract will likely describe exactly what this $150k is for (rent, lease, etc.). I'd probably call it exactly (or as similar as possible) to what the legal contract is saying and call it a day. I don't really think it's something too important either way. By far, the most important part is expensing the $150k over a systematic and rational method over 40 years (or shorter, if necessary). You could call it, "Green Eggs and Ham" expense and not get into any trouble with the IRS or the SEC... Granted, you might get asked, "WHAT ON EARTH IS THIS?" but you'd be fine, as you can support the expense.

 

[Fidget]

I would class this as an operating lease, so the land is not capitalised by the LLC. Instead, a straightforward payment is charged to the P&L each month. As the $150k is paid upfront, then it should be recorded as payment in advance, with the monthly/annual amount debited to the P&L each period.