ABA Banking Journal - August 2008 - (Page 20) Community Banking calculations. Thus, he recommends fixing rental increases by some other means. The deals set up by Sandler O’Neill and American Realty, in partnership, typically base annual rental increases on the lesser of the CPI or 2.5%. In general, the longer the bank has owned the property, the more it has been depreciated and the lower the book basis of the property. And the lower the book basis relative to current market value, the bigger the potential book (GAAP) gain when the property changes hands, points out Sandler O’Neill’s Tom Killian. Several changes and flows result once the deal has been done. First, the net proceeds of the purchase go to the bank. This fresh capital can be used for a variety of purposes. Second, there are multiple income streams. One comes from the reinvest- ment of the capital raised (if it is reinvested). Another comes from the gain recognized under GAAP from the sale; this is amortized over the life of the lease term. (By way of example, in the Harleysville National sale-leaseback, the company has received net proceeds from the sale of $38.2 million. The actual gain on the sale, versus the purchase prices of the properties, came to $18.9 million, of which $2.3 million was recorded in 2007. The remaining gain, according to the company’s 10-K, will be deferred and amortized through a reduction of occupancy expense over the 15-year term of the operating leases.) Third, the expense of depreciation, if any, is eliminated. Thus this drag on earnings goes away. On the expense side, depreciation is replaced, in that the bank now is making rental payments under the lease. There are other payments, as well, required under the triple net lease, but those are costs the bank would have been paying as an owner, too. Assuming no hitches—regulatory approval is not normally required—a sale leaseback can go from signing of a letter of intent through to purchase and delivery of payment in 60-90 days, according to Tom Killian of Sandler O’Neill. Jonathan Horn points out that saleleasebacks are typically more beneficial to a bank than mortgaging the same property. For example, 100% of payments made under an operating lease can be written off, while only the interest portion of mortgage payments can be written off. There are tax considerations, of course, which require a tax professional’s advice. Horn points out that any sale of property will involve capital gains tax. He says, however, that a bank can marry a sale- 20 AUGUST 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.captiveindoormedia.com http://www.ababj.com
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