Lease-leasebacks finance construction for municipalities
There are several different lease and financing methods available. One often used for construction projects is the lease-leaseback. Under this method, the owner of a property can lease it to a contractor to develop the project.
Once the project is done, the contractor acts as a leasing company and leases the completed asset back to the owner. The organization can pay the contractor over the course of the project and post-project occupancy period, or the contractor can finance the project and then receive lease payments at the completion.
Lease-leasebacks are typically used in construction projects and are a popular tool for school districts constructing new properties. The lease-leaseback can also be used for other purposes, including high-occupancy municipal buildings, where the organization doesn’t have the ability to fill the entire space.
Example:
An example of a lease-leaseback is a public school district that needs to make improvements to one of its buildings. The school district leases the building to a developer for a specified period of time, such as 10 years. The developer uses the lease agreement to secure financing for the building improvements.
The developer makes the necessary improvements to the building and leases it back to the school district, who now has access to a newly improved building. The school district makes rent payments to the developer for the use of the building during the lease period.
At the end of the lease period, the school district has the option to purchase the building or enter into a new lease agreement with the developer.
Both parties in a leaseback must account for the arrangement as a net transaction, which is different from the normal sublease accounting method. Per GASB 87, one party would recognize a net lease receivable, while the other would recognize a net lease liability. Although the accounting presentation is net, each party discloses the gross values for the lease and leaseback transactions in the notes to its financial statements.
What’s important here?
Lease-leasebacks are specifically used in construction projects and are a popular tool for school districts and high-occupancy real estate. Both parties must account for the arrangement as a net transaction, one with a net lease receivable and the other with a net lease liability.
