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BUILD-TO-SUIT LEASE ARRANGEMENTS are efficient means for companies to access expensive assets. A user becomes a lessee when it signs a lease on an asset to be built-think of a commercial airplane, an ocean-going freighter or a corporate headquarters building. These assets are all essential components of the businesses, but are far too costly for most companies to simply write a check. These purchases can be financed through a variety of loan products, but most will require a sizable cash outlay. Additionally, the outflow of funds will likely be made well in advance of the completion of the asset. Leasing a build-to-suit asset, in many cases, may prove to be the best vehicle for users to gain access to assets otherwise out-of-reach because the lessor-owner funds the construction. Further, rent on the asset does not commence until completion of construction and the lessee gains use of the asset.
Entering into a build-to-suit arrangement allows a lessee to tailor the asset to its needs and lease it upon completion. Ideally, the asset will never appear on the lessee's balance sheet and will be classified as an operating lease. However, if the onerous rules found in ASC 840-40-55 are not followed, the asset will be capitalized on a lessee's balance sheet during construction, even if title to the asset never passes to the lessee. If capitalization occurs, sale-and-leaseback accounting must be used at the completion of construction to determine if the...