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The Corvus International Financing Process

Corvus International's Investment Criteria

Sample Financing Commitment Letter

Required Due Diligence Items

A Summary of the Sale and Leaseback Process

The 1031 Tax Free Exchange

Executive Summary of the FASB Rules

An Overview of the Synthetic Lease Structure

A SUMMARY OF THE SALE AND LEASEBACK PROCESS

A taxpayer may want not only to sell a property and retain an economic interest, but also to continue using the real estate. An operating company, such as a corporation, frequently wants to convert its real estate into cash while at the same time using the property in it business operations. The company cannot meet these two objectives-a retained economic interest and continued use-through an outright sale. Its alternatives are to retain ownership of the property and obtain mortgage financing, or to sell the property and simultaneously lease it back from the purchaser.

The Choice between Mortgage and Lease Financing

The choice between these alternatives will depend primarily on the following factors:

1. The amount of capital the company can obtain for the real estate
2. The cost of capital
3. The tax effect of the transaction
4. The financial accounting treatment of the transaction
5. The residual value of the property
6. The rate at which the company can reinvest the capital (i.e. the company's investment opportunity rate).

In comparing a choice between ownership through a traditional mortgage versus a lease alternative you must look at each of these six factors in order:

1. AMOUNT OF CAPITAL REQUIRED
2. COST OF CAPITAL
3. TAX CONSIDERATIONS
4. BALANCE SHEET CONSIDERATIONS
5. RESIDUAL VALUE
6. CORPORATE REINVESTMENT RATE

SUMMARY OF CONSIDERATIONS IN DECIDING BETWEEN MORTGAGE & LEASE FINANCING:

It is difficult to make a decision between mortgage and leasing on a purely quantifiable analysis. Certain factors will prevail under different circumstances. For example, a company heavily burdened by debt as a result of a leveraged buy-out may grasp eagerly for a lease financing, since it may not only avoid adding new debt to its balance sheet but it may use the proceeds to reduce existing debt. Alternatively, the company's faith in the future value of its real estate may take such precedence over any other factor that mortgage financing become the inescapable choice.

COMPARISON OF MORTGAGE VERSUS SALE-LEASEBACK FINANCING

Factor Mortgage Financing Lease Financing

Factor	Mortgage Financing	Lease Financing

Amount of Capital	Usually Between 70% and 80% financing under a conventional non-recourse mortgage	Usually equal to 100% market value of the property

Current Cost of Capital	Based on market rates and company's credit standing	Usually about 1% to 1.5% below the cost of conventional mortgage financing

Tax Effect	No tax on the financing, Company can deduct interest on mortgage and depreciation Tax on gain from sale.	Company can deduct rents payable under lease in full.

Balance-Sheet	Mortgage is recorded as debt on Company's balance sheet.	If a "true" lease the treatment of the financing will be "off-balance sheet"

Residual Value	At maturity of the residual value and capital appreciation will belong to the Company.	At the expiration of the lease term, residual value and capital appreciation will belong to the lessor (i.e. the purchaser of the property from the company).

Reinvestment	Company will usually have less capital to reinvest than under lease financing. Therefore, the higher the company's reinvestment rate, the less attractive the mortgage alternative becomes.	Company will usually have more capital to reinvestment than under mortgage financing. Therefore, the higher the company's reinvestment rate, the more attractive the leasing alternative.