As a step toward improving and converging the existing lease-accounting standards, the Financial Accounting Standards Board and the International Accounting Standards Board recently issued a discussion paper titled "Leases: Preliminary Views" in which the Boards jointly propose several elements of a new model for lease accounting. This month's column will explain the key elements of the Boards' proposal and the potential impact of those elements on entities that must account for leases. The key elements of the Boards' proposal are: 1. the elimination of the finance/operating lease distinction, and 2. a requirement to represent all leases on the lessee's balance sheet through a combination of an asset and a liability. Specifically, they have concluded that a lessee's right to use leased ...
A common scenario in tax credit site management is the household that becomes uncommunicative at recertification time. Failure to recertify is one of the most common reasons for not renewing a tax credit household's lease. The nonrenewal procedure is a necessary step to ensure that the unit stays in compliance, but it can be a sensitive issue for all concerned. The best safeguard against objections to lease nonrenewal can be found in the lease itself. Tax credit leases include language or an addendum that specifically states the grounds to terminate the tenancy, including tax credit-specific ground. State that approximately 120 days prior to the expiration of the lease term, the owner will ask the resident to report his household income and provide information regarding the household an...
How a credit default swap can be used to hedge the counterparty risk associated with a portfolio of leases and, at the same time, increase the net present value of uncertain lease cash flows is illustrated. Asset finance firms will find that the hedge both reduces the variability of cash flows and hence increases the value of the firm. The article explores the concept of creditworthiness and credit default swaps, constructs a sample portfolio, and evaluates the use of credit default swaps to hedge default risk. The hedged diversified portfolios had higher expected NPVs and higher expected return-to-risk ratios than the unhedged diversified portfolio. A firm with advanced mathematical knowledge could use a proxy hedge such as a basket CDS on the industry sector of the small firm.
The In re Commercial Money Center Inc. case, in which the Bankruptcy Appellate Panel of the 9th Circuit held that the Uniform Commercial Code (UCC) protects flexibility in lease financing transactions at the expense of allowing a form of fraud that ultimately cannot be protected against is examined. It is concluded that the BAP was wrong to emphasize flexibility at the expense of preserving integrity in lease financing transactions, discussing some of the problems raised by the BAP's decision, and explains how the BAP could (and should) have read the UCC to both protect the integrity of lease financing while preserving the ability to fractionalize lease-derived forms of collateral. Some practical steps that may give at least partial protection against the problems created by the BAP's d...
With demand increasing for leasable space in green buildings, it may be surprising that there is no widely accepted definition of a "green" lease. Green buildings offer benefits for owners and tenants. There are numerous green building standards that are now being used in the commercial building industry, but the three most widely used and recognized in the US are Leadership in Energy and Environmental Design, Green Globes and ENERGY STAR. An environmental management plan is a document that describes the environmental standards, pollution control measures, performance criteria and practices that a building owner and its tenants will follow to reduce negative impact on the environment. The reasons for the growth of green building include the desire of individuals and local governments to...
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