ABA Banking Journal - August 2008 - (Page 18) Community Banking and turn it into capital,” says Mary Lynn Lenz, a former New England banker whose institution, since sold, looked seriously at sale-leasebacks before deciding to put itself on the block, instead. Indeed, Bank Realty’s Capello notes that real estate is a depreciating asset. “If a bank is sitting there with depreciated branches, they are actually impairing shareholder value, to a degree,” he argues. How it works While there are variations, at a detail level beyond the scope of this article, the basic sale-leaseback transaction, in principle, is relatively straightforward. The bank sells its property or properties to an investor, who then leases the building and land back to the same institution. Not one desk gets moved. Properties are appraised and change hands at fair-market value. The bank moves from being an owner to a tenant. (Some de novo banks have structured the building of their branches, effectively, as a sale-leaseback from their inception.) While the property clearly has changed hands, in some ways the transaction is more of a financing arrangement than a real-estate deal, according to Jonathan Horn, CEO of Horn Capital Realty, Miami, Fla.: “It’s like a bond in the form of a lease agreement encompassed by real estate.” The bank, as tenant, engages in an operating lease. Generally these run for 10-20 years. Typically the operating lease is contracted as a “triple net lease” contract. In a triple net lease, most of the cost aspects of ownership—maintenance, insurance, and taxes, for instance, reside with the tenant. For the transaction to make sense for the bank, along the lines that follow, it must be structured as an operating lease, by accounting rules. Statement of Financial Accounting Standards 13 (“Accounting for Leases”) and Statement 98 (“Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate…”) guide the structuring. (While the Financial Accounting Standards Board has a lease accounting project under way, it will not be exposed for public review until the last quarter, and would not likely be effective earlier than 2010.) Pricing of the acquisition and determination of rents must be done carefully to avoid breaking accounting rules. Bank Realty’s Capello, for instance, points out that his firm usually avoids lease payment increases indexed to the Consumer Price Index. While CPI-based increases are an industry norm, he says they are unpredictable and can upset the parties’ original 18 AUGUST 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.horncapital.com http://www.consultantsandbuilders.com http://www.consultantsandbuilders.com http://www.ababj.com
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