What Do We Want Off Our Balance Sheet?
Kuanysh Company is considering purchasing a large retail location. The retail site includes a large parking lot, loading dock facilities, and a warehouse sized store suitable for sale of both general merchandise and groceries. The retail site is in a prime location and costs $15 million. Kuanysh has arranged to borrow the entire $15 million purchase price from a local bank. When the transaction is completed, Kuanysh will have total reported assets of $65 million and total reported liabilities of $40 million. Kuanysh has been approached by a real estate company that has offered to buy the property and then lease it to Kuanysh under a long term, noncancelable lease contract. If the lease contract is carefully designed, neither the $15 million real estate asset nor the $15 million loan obligation will appear on Kuanysh’s balance sheet. Why might Kuanysh want to enter into this lease contract rather than simply borrowing the money and buying the location itself?