467 Uneven Rent Regulations July 1999
SuperTRUMP was updated iin accordance with the final Section 1.467 regulations issued May 18, 1999 by the Internal Revenue Service relating to leases with uneven rents.
The changes include revisions to the FASB/IRS Treatment Parameter screen and IRS Classification Controls screen, a revised uneven rent test, algorithms for constant rent accrual, proportional rental accrual, the capability to shift rent payments to occur before or after the rental accrual period, and revised reports.
The 467 Regulations
One of the main provisions of the new regulations is to allow a rent holiday at the start of the lease. The actual rent accruing during this holiday does not need to be 0, but it must be less than the average annualized rent accruing over the full term. The rent holiday may be up to 90 days in length, or in certain circumstances even longer. It may not, however, be longer than 10% of the lease term or 24 months. In SuperTRUMP, you may specify the length of the rent holiday.
If the uneven rent test fails, the constant rent accrual (CRA) or the proportional rental accrual (PRA) provisions may apply. The CRA provisions apply to long term leases, while the PRA provisions apply to short term leases.
CRA/PRA is the restructuring of a rent structure into "level" arrears rents for tax purposes. This restructuring is performed by calculating the PV of the uneven rent structure at 110% of the applicable federal rate (AFR), then computing the level arrears rent structure that has the same PV. An imputed loan is additionally constructed from the differences between the actual cumulative rent payments and the CRA/PRA cumulative payments, and the imputed interest. The interest rate on this loan is also the AFR. The income for tax purposes, then, is the sum of the CRA/PRA rent and the imputed interest, spread monthly. Whether constant rent accrual is required for a particular lease is at the discretion of the IRS Commissioner, when certain tests fail, but failing the tests does not automatically imply that CRA will be used.
PRA is similar except that the amounts are restructured to be proportional to the original amounts, while also achieving the same PV.
Finally, the new regulations appear to allow substantial flexibility in structuring the cash payments in a lease. Specifically, the rent accruing to a given rental period may be paid as early as a year before the beginning of the calendar year of the period, or as late as a year after the end of the calendar year of the period. The legitimacy of a structure that includes shifted payments is shown by the prepaid/deferred rent test. It is documented as the second part of the uneven rent report and tests whether the cumulative cash rents track the cumulative accrued rents, within one year (forward or backward). If the rents are paid too soon, then the quick screen and summary report indicate a failure of prepaid rents. If they are paid too late, a failure of deferred rents is indicated.
Multiple Deliveries
In SuperTRUMP the weighted average delivery is used to determine the full lease term, and the associated average annual rent. Even if rent accrues before the weighted average delivery date, that rent is included in the average annual rent calculation. Rent is annualized using the term from the weighted average delivery date to the end of rent accrual. A rent holiday (if present) is assumed to start at the weighted average delivery date for purposes of calculating the term, yet the rent accruing before this date (if any) would still be considered part of the holiday (i.e., excluded from the base term). Similarly, the weighted average delivery date is used to annualize the holiday rent. Note that annualization determines the amount equivalent to a "year's worth". (For example, with a 300-day holiday with 360-day years, the annualized rent would be 360/300 of the accrued rent.) In most cases the holiday is shorter than a year, but it could be longer. (If the holiday were 400 days, the annualized amount would be 360/400 of the accrued rent) Also, the annualization of the holiday disregards calendar year boundaries and considers only the term and the accrued rent.
SuperTRUMP Modifications
New items and features include the following:
In IRS Classification Controls
In IRS/FASB Treatment Parameters
In Features
In Parameters - FASB/IRS Treatment, the selection of constant rent accrual is available. In Controls - IRS Classifications, the selections for the year boundary method have been revised. The "commencement" method, called "Revenue Procedure 75-28", continues to be available, but the 3 "proposed" interpretations ("fiscal", "calendar", and "annualized") have been replaced by the new method, called "Section 1.467-3(c) (4)". The checkbox for disregarding the uneven rent test if the total rent is less than $250,000 remains.
Parameters - IRS/FASB Treatment contains the selections for "leveling" a rent structure. Two methods are available: level and proportional. Level finds a single periodic rent that is equivalent to the PV of the actual cash rent. Proportional finds a stream of rents equivalent in PV but which additionally maintains the proportions of the cash rents. The 3 CRA rates--short-term, mid-term, and long-term-are also in this screen. These are the semi-annual applicable federal rates. SuperTRUMP selects the appropriate rate from the three, depending on the lease term (using the weighted average delivery date as the start of the term). [Short applies to lease terms less than 3 years, mid-term up to 9 years, and long-term above 9 years]. The input (annual) rate is converted between periodicities using the following formula:
r = c ( ( 1 + i/b) b/c - 1)
where:
i = rate based on b periods/year
r = rate based on c periods/year.
b = periods/year for i
c = periods/year for c
example:
8% semiannual converted to monthly:
12 ( (
1 + 0.08/2) 2/12 -1) = 7.87%
Activating the feature "Shift cash dates from accrual dates" in Controls - Features adds an additional column ("rent shift") to the rent screen to allow enhanced structuring flexibility. The rent shift moves the cash date the specified number of days from the normal cash date. (Advance rents are shifted from the start of the accrual period; arrears rents, from the end.) The default is 0 days, i.e., no shifting. A positive value shifts the payment into the future, while a negative value shifts into the past. The resulting cash date, thus, can fall before the start of accrual, part way through the accrual period, or after the end of accrual. Each step can be separately specified.
Finding the Rent Holiday
In SuperTRUMP, you can specify the length of the rent holiday. You can also specify the maximum holiday length and let the program find a date that passes the uneven rent test. In that case, the dates considered as the holiday end include the weighted average delivery date (i.e., no holiday), each rent payment date and each rent accrual start and end date during the maximum holiday, and the last day of the maximum holiday. The dates are tested in order of shortest-to-longest holiday, and the earliest date that passes (assuming that one passes) is selected. Neither the time nor the rent associated with [i.e., accruing to] the rent holiday is used in calculating the base-term average annual rent.
New Reports
A new report is available to document the rental structure, including the shifted cash dates. It is called the Payment Schedule: shifted, in the Basic report group. For each rent payment, it shows the accrual period and length, the number of days shifted, and the resulting cash payment date
The Uneven Rent report has also been revised. At the top, it prints a breakdown of the holiday and base terms. It shows whether the holiday is legitimate, based on its length and average annualized rent. Under the base rent section, the minimum and maximum rent amounts are displayed, followed by the accrued rent, annualized rent, and status (pass or fail) for each calendar year. The second section, displayed only when rent shifting is used and the prepaid/deferred test is activated, details the cumulative accrued and cumulative paid rents, as well as the resulting status of prepaid or deferred rent amounts. (See attached samples of both reports.)
The 467 calculation report has been updated. As it is based on an individual rent screen, including the imputed loan, the rent screen must be specified.
