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Leasehold Equities is the home of a patented technique to finance the acquisition of commercial property without a balance sheet liability—whether in the form of a mortgage or the lease liability mandated under final lease accounting standards issued by the FASB and IASB in early 2016.1/ Our technique also avoids earnings charges associated with such a liability, typically saving well over 40% of the GAAP expense associated with a 15-year lease of the same building—based on a comparison of the present value of earnings charges per common share of the building user.

We accomplish these results by financing the purchase or construction of a building or other long-lived asset with ILPS Preferred® stock, dividends on which are funded through an internal lease between a corporate user and its sister company finance subsidiary that issues the stock.2/. In projections using real world properties the reduced cost of capital and accounting advantages of ILPS Preferred® have demonstrated savings of between 68% and 75% in the present value of a corporate user’s overall earnings charges, which equates to a savings of 29% to 48% per common share, in comparison to a long-term lease.

In the corporate real estate arena ILPS Preferred® is especially useful for acquiring or refinancing core assets such as a headquarters building or data center, and for new construction including tenant improvements. It can also be used to avoid a balance sheet liability and lower earnings charges for long-lived equipment such as airplanes, truck fleets, and factory equipment.

Key Benefits of an ILPS Preferred® Financing

To the Asset User

  • No liability on the balance sheet.
  • Cost of capital reflects User’s credit—not that of the developer or property market embedded in third party rents.
  • Most efficiently allows User to leverage demand for its credit into reduced occupancy cost.
  • Typically lowers earnings charges per common share by more than 40% (NPV)—see our Example.
  • Avoids the need to manipulate lease terms in order to achieve Operating Lease treatment, which is less certain and more difficult for core assets under the new rules.

To the Preferred Stock Investor

  • Preferred dividend is backed by a stream of rent under an internal lease guaranteed by a creditworthy parent company.
  • Dividends are taxed at capital gains rates, in the case of an individual shareholder who meets holding period requirements.
  • Dividends are eligible for the 50% dividends-received deduction, in the case of a shareholder that is a C corporation.
  • Periodic adjustment of dividend based on market rates offers inflation protection.
  • If shareholder is a REIT, dividends count toward the 95% gross income test.

      1/Financial Accounting Standards Board, Accounting Standards Codification 842, Leases, February 25, 2016; International Accounting Standards Board, International Financial Reporting Standards 16: Leases, January 13, 2016.
      2/ ILPS Preferred® is protected by U.S. Patent No. 8,548,891, issued October 1, 2013 to Leasehold Equities LLC.