Lease Purchase Analysis
SuperTRUMP has the abiltity to model a sale or purchase of an existing lease. The lease is "chopped" on the purchase date resulting in a transaction which starts on the purchase date. The remaining rents and debt service remain unchanged (except to allow for rent or interest which accrues prior to the purchase). After the chop is performed you may solve for the purchase price by targeting the equipment cost.
While the chop is simple to perform, the results can be rather complicated. Please read through the following explanation to insure that you are pricing your lease purchase properly.
To chop a lease, from the Process menu select Modify. The Modify dialog box will appear. In the list box on the left, select "Lease Purchase Date." Then enter the chop date, click the Modify button, and the OK button.
The chop is simple if the purchase is on a payment date, or if the rents are in advance. However if the purchase is between payment dates and if payments are in arrears, then the analysis becomes more complicated. At issue is the treatment of previously accrued rent and debt.
Here is an example to help demonstrate SuperTRUMP's handling of these cash flows.
| Lease purchase date |
2/15
|
| Next cash flow date |
2/20
|
| Equipment cost 2/15 |
$1,000,000
|
| Rent accrued prior to 2/15 |
10,000
|
| Rent accrued 2/15 - 2/20 |
2,000
|
| Total rent paid 2/20 |
12,000
|
| Interest accrued prior to 2/15 |
5,000
|
| Interest accrued 2/15 - 2/20 |
1,000
|
| Outstanding principal as of 2/15 |
400,000
|
| Principal paid 2/20 |
4,000
|
| Total debt service paid 2/20 |
10,000
|
On 2/20 $12,000 will be collected in rent, but only $2,000 of this amount will be taxable. The $10,000 that was previously accrued is considered a "receivable". This receivable must be purchased from the previous lessor, and therefore a non-depreciable asset is created in SuperTRUMP to reflect the purchase of this receivable. This creates two non-taxable cash flows that net to zero: the purchase of the receivable as an asset (paid 2/15), and the collection of the receivable as rental income (on 2/20). The only effect of these cash flows is a slight decrease in the yield.
The interest accrued prior to 2/15 is just a bit more complex. The net effect, like the rent, should be two non-taxable cash flows that net to zero. This time though, the effect should have a slight positive effect on the yield, since the positive cash flow occurs a few days before the negative cash flow. These cash flows could be entered in a few different ways.
The method that SuperTRUMP uses is to treat the previously accrued interest as acquired principal, at a zero percent interest rate. Therefore the leverage that SuperTRUMP shows on the lease purchase date of 2/15 accurately represents the total debt which is $405,000 ($400,000 + $5,000 accrued interest). The payment of the previously accrued interest then shows up as part of the Debt Service on 2/20, as principal. So the two cash flows show up as a $5,000 takedown on 2/15 and a $5,000 principal repayment on 2/20.
The only possible disadvantage to showing the previously accrued interest as debt is if there are fees attached to the purchase of the lease that are based on "Total Assets". The previously accrued rent will increase "Total Assets", but the previously accrued interest will not decrease "Total Assets". The user may want to exclude the rent receivable in calculating the fee.
One question that frequently comes up is what amount should be written on the check to buy the lease. The answer is the sum of the assets (including the rent receivable asset) less the total leverage (including the previously accrued interest that is broken out into a separate loan screen). So in this case $1,010,000 - 405,000 = 605,000.
Once a lease has been chopped by using "Modify - Lease purchase date", you should be careful to exclude the non-depreciable asset when targeting cost.
