Examples of continuing involvement, regardless of whether they are only present in the event of a contingency, that prohibit sales recognition and instead require accounting under the deposit or financing method include:
• The existence of an option to repurchase the property sold, even though the option price is equal to the then fair value of the property at the date the option is exercised. A ―right of first refusal‖
does not constitute an option to repurchase. See Section 9.2.2, for a further discussion of a right
of first refusal.
• An obligation on the part of the seller-lessee to repurchase the property sold, or the ability of the buyer-lessor to compel the seller-lessee to repurchase the property at any time in the future.
• The seller-lessee or a party related to the seller-lessee guarantees the buyer-lessor‘s investment or a return on that investment for either a limited or extended period of time. For example, a guarantee by the parent company of a lease entered into by a subsidiary of the parent constitutes a form of continuing involvement. Payments required by the seller-lessee for a decline in the fair value of the property, including a guaranteed residual value, also constitute a form of continuing involvement by the seller-lessee.
• Any form of continuing ownership in the property. For example, if the seller-lessee sold the property to a partnership in which the seller has a partnership interest, no matter how minor, sales recognition would be prohibited.
• The seller-lessee provides non-recourse financing to the buyer-lessor for any portion of the sales price or provides recourse financing in which the only recourse available to the seller is the property sold. This provision also applies to financial institutions that in the normal course of business provide real estate financing. In addition, if recourse financing is provided but the buyer-lessor is a non-substantive lessor, such recourse financing would be viewed as continuing involvement.
• The seller-lessee is not relieved of its obligation under any existing debt related to the property. Forexample, if the seller-lessee remains secondarily liable on outstanding indebtedness related to the property sold, sales accounting is prohibited.
• The seller-lessee provides collateral to lenders or the buyer-lessor other than the property directly involved in the sale-leaseback transaction, or the seller-lessee (or a related party to the seller-lessee) guarantees the buyer-lessor‘s debt.
• The seller-lessee‘s rental payments are contingent on some predetermined or determinable level of future operations of the buyer-lessor.
• The seller-lessee enters into a sale-leaseback transaction of real estate that also involves property improvements or equipment without selling or leasing the underlying land to the buyer-lessor.
• The seller-lessee is required to initiate or support operations or continues to operate the property at its own risk, for an extended period, for a specified limited period, or until a specified level of operations has been achieved (for example, until rentals of a property are sufficient to cover operating expenses and debt service).