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RD
RD, Certified Public Accountant (CPA)
Category: Finance
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Experience:  MBA, CPA
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How do I capitalize a lease

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Our company is making an investment to purchase a restaurant. We are trying to figure out the simple yet accurate method of how to capitalize the lease and how to capture a truer ROI. Please walk me through the steps. Can you put it on a spreadsheet? How is it calculated (Capitalization of a lease, ROI), does this include PV's, etc? Here are some facts: Rent is 205,974 per year, Sales anticipated is 2,000,000, the capex (Signage, smallware, build out) is 1,173,125. I don't know if you need this, but the COGS for the year is 510,000, labor is 614,500, operating exp is 638,300.
Submitted: 8 years ago.
Category: Finance
Expert:  RD replied 8 years ago.

Is this an operating lease....meaning you would pay $205,974 per year as long as you have lease and will not own the property at the end of lease or is it a capital lease wherein you will pay $205974 for a number of years and own the property at the end of the lease...



$1173125...is this amount spent by you in addition to the rent paid or is it the value of the assets on which you will pay the rent for a number of years?

Customer: replied 8 years ago.
Reply to Renu V's Post: regarding the operating and capital lease, please do both scenarios.

regarding the 1,173,125. this amount is in addition to the rent. It consists of items to get this restaurant built to operate...

Build Out      $450,625.00
LL Allowance      $(125,000.00)
FF&E      $420,000.00
Games      $125,000.00
POS      $35,000.00
Signage      $20,000.00
AV      $60,000.00
Smallwares      $30,000.00
Security      $20,000.00
Menu Boards      $7,500.00
Plans & A&E      $30,000.00
Pre-opening Exp      $100,000.00
Expert:  RD replied 8 years ago.
Is rent included in the operating expenses? To get you a present value....analysis what is the interest rate that you would expect?
Customer: replied 8 years ago.
Reply to Renu V's Post: Rent is inlcuded in the operating expenses.

I really don't know if we need or don't need a PV analysis. That was part of the question. For a proper analysis, ROI and capitalizing the lease do we need a PV?

Are you referring to the discount rate? I'm not sure what you mean by interest rate. I'm ntrying to make sure that I can do a ROI and capitalizin the lease correctly. I'm not sure if this applies, the discount rate should be modeled as risky, which is about 15% and also medium risk, which is 12.5% and low risk which is about 11%?
Expert:  RD replied 8 years ago.

Attached is the worksheet with the analysis...I have assumed that you will borrow the funds required for investment $1,173,125 at 9%.


Present value analysis generally means that if you have inflow coming in over a period of years than what is it's value as of today. You can then use the present value so arrived with your invesment and determine if the investment is profitable or not. We can do a present value analysis for your project but for that we need to know the inflows over a number of years...


The ROI based on the information you provided is appx.11% after considering the interest expense.


You will capitalize the investment expenditure (as listed by you). But lease (rent) will not be capitalized unless you have the option to own the property at a bargain price at the end of the lease.


2006-08-10_100002_Book6.zip


Let me know if you have any question.



renu@yashcon.com



Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.


Customer: replied 8 years ago.
Further to below:

Thanks for the ROI, however, these are the questions I really need answered please...How do I capitalize expenditure? Also, I don't understand what you mean when you own it. We own this restaurant, we will build it. We will be paying the lease. How do I capitalize the lease?

Reply to Renu V's Post: Let me look at your answer. To answer your question about borrowing the $1.7MM and 9% interest, no we will not borrow, we are well capitalzed with cash of $7MM and our company will internally fund this expansion. So, I'm not sure of this changes your analysis.
Expert:  RD replied 8 years ago.

That would not change the analysis if you consider opportunity cost perspective.....assuming that you could have used the funds elsewhere and made 9%.....


But yes, if you will fund the investment than you can say that in that case your ROI will be 11% + 9% = 20%....


Tax and depreciation has not been considered in the analysis but tax(assuming tax rate of 33%) and depreciation (considering average write off over 10 years for analysis purposes)....may affect your ROI and reduce it to 17% appx.



Let me know if you have any question.



renu@yashcon.com



Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.



Customer: replied 8 years ago.
Reply to Renu V's Post: Sorry, maybe I'm not making myself clear. I appreciate your responses, but my ulitmate question is how do I "capitalize the lease"? Please walk me through it on a spreadsheet. That's what I really need to know. You have all the variables and parameters, I beleive. There have been so many articles on capitalizing a lease and I have been asked this question. I don't know how to do it.
Expert:  RD replied 8 years ago.

You cannot capitalize the lease (which is Rent) unless you own the property at the end of the lease or you have an option to own the property at bargain purchase price. The rent in your case will be classified as operating lease unless you own it at the end of the lease. In order to capitalize the lease it should be a capital lease....discussed next..


A capital lease is a lease that transfers substantially all the benefits and risks inherent in the ownership of property to the state. A lease must meet one or more of the following four criteria to qualify as a capital lease:



  • Ownership of the leased property is transferred to the state by the end of the lease term; or

  • The lease contains a bargain purchase option; or

  • The lease term is equal to 75 percent or more of the estimated useful life of the leased property; or

  • If, at the inception of the lease, the present value of the future minimum lease payments, excluding executory costs (usually insurance, maintenance, and taxes paid in connection with the leased property, including any profit thereof) is 90 percent or more of the fair value of the leased property.

You can however capitalize the build out and other expense incurred by you...


You can capitalize the Capital improvements which include structures (e.g., office build out, storage quarters, plans & and other facilities) and all other property permanently attached to, or an integral part of, the structure (e.g., loading docks, heating and air-conditioning equipment, and refrigeration equipment).


You can capitalize Furniture, fixtures, gaming equipments, menu boards. software, or other equipment etc.. which not an integral part of a building as either furniture or equipment.


You can capitalize signage.


You can capitalize preopening costs as other intangible assets and amortize these expenses.


Let me know if you have any question.



renu@yashcon.com



Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.







RD, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 8784
Experience: MBA, CPA
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