Some leases have many rent steps, created according to a standard formula. EZLease offers two ways of specifying such formulas to create a series of rent steps.
Rent Escalation
Many leases have rent steps that increase by a fixed percentage or dollar amount every number of years or other periods. EZLease can create the full series of steps based on the initial rent. Any rent steps previously entered for the period specified will be deleted. If you select a period starting after the beginning of the lease or ending before the expiration of the lease, however, the remaining rent steps will be kept.
To create escalating rents, select the Lease menu, Rent Escalation. Be sure to set the correct begin and end date for the lease first.
The escalation selections that you make are kept for future reference; if you open the Rent Escalation window again, the most recent selections are displayed.
|
Field |
Definition/Format |
|
Start Date |
Enter the date that the base rent step begins. The default is the begin date of the lease. |
|
End Date |
Enter the date that the final rent escalation step ends. The default is the end date of the lease. |
|
Rent Payment Period Length |
Enter the frequency of the rent payments. |
|
Increase Every |
Enter how often the rent increases. The frequency cannot be shorter than the payment period length (for instance, if rent is paid quarterly, the increase cannot be monthly). Enter the net rent (excluding executory cost or non-lease components) and executory cost separately, since they may be on different schedules (executory cost may not increase at all, for instance). |
|
Executory Costs/Non- lease Components |
Select whether to enter executory costs or non-lease components. |
|
Initial Amount |
Enter the initial payment for each of net rent and executory costs or non-lease components, before any increases. |
|
Increase |
Enter the percentage or dollar amount by which the rent increases each time it changes. For the executory costs or non-lease components, if you choose a dollar amount, only Exec Cost #1/Component #1 is incremented; if you choose a percentage, all executory costs/components increase. |
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%/$ |
Specify whether the increase is a percentage or a dollar (currency) amount. |
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Compounded? |
Check the box if the percentage increase compounds, so that the second increased step is calculated as a percentage higher than the first increased step. This option is disabled if the increase is a dollar amount. Examples: 1. A 20-year lease is 1000 per month (with no executory costs) for the first 5 years, 1100 per month for the next 5 years, then 1200, then 1300. Enter a rent payment period of Monthly, increase every 5 Years, net rent initial amount 1000, increase 100 $ or 10 %, compounded box unchecked. 2. A 10-year lease is 100 per month net rent, 10 per month executory cost, for the first year. Each year following, the net rent increases by 5% compounded (105, 110.25, 115.76, 121.55, etc.); the executory cost does not change. Enter a rent payment period of Monthly, increase every 1 Years, net rent initial amount 100, increase 5%, compounded box checked; executory cost initial amount 10, increase 0 (%/$ and compounded box don't matter). |
Level Principal Amortization
Some leases, most often vehicle leases, are designed with a rent amount that changes each period (usually monthly). The initial principal amount is divided evenly over the life of the lease, and interest on the remaining principal is calculated each month, sometimes with an extra fixed management fee, and/or executory costs.
To generate level principal amortization rent payments, select the Lease menu, Level Principal Rent. A new screen pops up to enter the details. Enter the initial principal amount (the default is the fair value of building/equipment, if entered), the interest rate (as a yearly percentage), and any fixed fee and executory costs. If the payment frequency is not monthly, select the proper period length. The principal can be amortized either equally over the life of the lease or based on a particular percentage rate. If you have entered a guaranteed or unguaranteed residual, the principal is amortized down to that amount. “Round rent components” determines whether the principal and interest components are rounded before (checked) or after (unchecked) they are added together, to match what your Lessor does.
If a lease starts with a fractional month (or other payment period, if you choose a payment frequency other than monthly), the first fractional period is assumed to be treated as interest-only for purposes of calculating the rent. Any extra fixed fee or executory cost is prorated.
If you amortize the principal based on a percentage rate and the rate does not exactly divide into an equal number of months (such as a 3% rate, which covers 33.33 months), your term should continue for the additional month, and a reduced rent is calculated for the final month. If the lease term is not consistent with the rate, EZLease will not calculate level principal rent.
All existing rent steps for a lease are deleted and replaced when you choose this option.
Please note that if the lease is finance, the liability payment calculated by EZLease may be different from the principal payment used to determine the rents. Many Lessors, when calculating rents, use a methodology not consistent with FAS 13; in particular, their calculation typically includes an interest component in the first month, which is not consistent with FAS 13 for leases paid in advance. Also, the FAS 13 discount rate may not be the same as the rate the Lessor uses (particularly if extra fees are charged beyond the basic principal and interest). For ASC 842/ IFRS 16/GASB 87, the discount rate used is the Lessee's incremental borrowing rate unless the Lessor's implicit rate is known, and knowing that requires knowing the Lessor's initial direct costs and unguaranteed residual, which is often information not available to the Lessee.
Some lease contracts with level principal amortization call for the interest to be variable over the life of the lease, based on an external rate such as LIBOR. In such cases, the lease should be set up using the rate in effect at lease inception; rent changes (positive or negative) due to future changes in the rate are considered variable lease payments (contingent rent in FAS 13/IAS 17), and should not result in revisions to the base rent. Instead, the difference between scheduled and actual rent should be entered (positive or negative) on the Variable tab, or uploaded using File / Variable Lease Payments Upload. (Under IFRS 16 only, a lease does need to be revised when rents change based on an index or rate, such as an inflation adjustment or a LIBOR rate change.)