EXECUTIVE SUMMARY OF THE FASB RULES

Some of the more significant provisions of the FASB Statements can be briefly summarized:

1. The company must not have the right, through an option or otherwise, to get the property back at the end of the lease term at a zero cost or a bargain purchase price.

2. The lease term, including bargain renewal options, must be less than 75% of the economic life of the property (unless the beginning of the lease term falls within the last 25% of the estimated economic life of the property)

3. At the beginning of the lease term, the present value of the minimum lease payments (i.e. the periodic net rent payments) must be less than 90% of the fair value of the property at the inception of the lease. For example, the fair value is presumable the sale price, or $10 million. The rents are $1,100,000 per year for twenty years. For the sake of simplicity, assume that both the company's and the purchaser's borrowing cost is 11%. In that case, the annual rent will be discounted by 11% to a present value of $8,759,661, or approximately 88% of the fair value ($10 million) of the property at the inception of the lease. As a result, this test will be met.

4. The company must not have a continuing involvement in the property after entering into the lease. A continuing involvement "results in the seller-lessee not transferring the risks or rewards of ownership to the buyer-lessor." Among the several examples of a continuing involvement is an obligation or option by the company to repurchase the property even if the price is market value. Continuing involvement also includes the company's right to participate in any of the purchaser's future profits or appreciation in the property.