westernnv
Sep 19, 2008, 09:39 AM
Tahoe Gaming is a casino corporation which intends to develop a casino property at Lake Tahoe on leased land. The terms of this transaction are as follows;
Lease term 25 years renewable for a further 25 years at the option of the lessee.
Initial 25 year rental: $2.5 million per year plus 10% of the net gaming win from the casino each year. Current projections place this net win at approximately $50 million per year.
Future option to renew for 25 years: $5 million per year plus an increase based on the increase in the property values in the Lake Tahoe area. Plus 5% of the net win per year. This is not considered to be a bargain renewal option at this date.
Fair market value of the land is estimated to be about $80 million if such land were generally available for casino construction (which it is not).
At the end of the lease any building and infrastructure revert without cost to the lessor.
Tahoe Gaming will build the casino and the surrounding infrastructure at a cost of $100 million. It is presumed that the building would last approximately 50 years. At the mid point of its life assume that its fair value would be about 40% of the cost value. Tahoe Gaming uses straight line depreciation for fixed assets.
Current interest rates for borrowing are about 8% for this company.
REQUIRED
Discuss how Tahoe Gaming should account for the assets and obligations discussed above.
Lease 2 (Do not consider this part for Lease 1 above. It was not known about at the inception of the lease.)
25 years have passed and things did not go quite as well for Tahoe Gaming as it thought and so it has taken a commercial decision not to exercise its option to renew the lease.
Another gaming enterprise, South Shore Slots has decided it will enter into a lease for both the land and buildings for the next 25 years. The terms of this lease are as follows:
Lease term 25 years not renewable.
Down payment at inception $10 million.
Initial rental $5 million per year plus 5% of the net gaming win from the casino each year. Current projections place this net win at approximately $30 million per year.
Fair market value of the land is estimated to be about $80 million if such land were generally available for casino construction (which it is not). The fair market value of the building was appraised to be about $40 million. South Shore will be responsible for demolishing the building at the end of the lease term and restoring the land to its virgin state. Estimated costs of this process are:
Demolition costs $5 million
Environmental clean up and landscaping $5 million
Current interest rates are approximately 8%
Assume that South Shore Slots also uses straight line depreciation or amortization as appropriate...
REQUIRED
Discuss how South Shore Slots should account for the assets and obligations discussed above.
Lease term 25 years renewable for a further 25 years at the option of the lessee.
Initial 25 year rental: $2.5 million per year plus 10% of the net gaming win from the casino each year. Current projections place this net win at approximately $50 million per year.
Future option to renew for 25 years: $5 million per year plus an increase based on the increase in the property values in the Lake Tahoe area. Plus 5% of the net win per year. This is not considered to be a bargain renewal option at this date.
Fair market value of the land is estimated to be about $80 million if such land were generally available for casino construction (which it is not).
At the end of the lease any building and infrastructure revert without cost to the lessor.
Tahoe Gaming will build the casino and the surrounding infrastructure at a cost of $100 million. It is presumed that the building would last approximately 50 years. At the mid point of its life assume that its fair value would be about 40% of the cost value. Tahoe Gaming uses straight line depreciation for fixed assets.
Current interest rates for borrowing are about 8% for this company.
REQUIRED
Discuss how Tahoe Gaming should account for the assets and obligations discussed above.
Lease 2 (Do not consider this part for Lease 1 above. It was not known about at the inception of the lease.)
25 years have passed and things did not go quite as well for Tahoe Gaming as it thought and so it has taken a commercial decision not to exercise its option to renew the lease.
Another gaming enterprise, South Shore Slots has decided it will enter into a lease for both the land and buildings for the next 25 years. The terms of this lease are as follows:
Lease term 25 years not renewable.
Down payment at inception $10 million.
Initial rental $5 million per year plus 5% of the net gaming win from the casino each year. Current projections place this net win at approximately $30 million per year.
Fair market value of the land is estimated to be about $80 million if such land were generally available for casino construction (which it is not). The fair market value of the building was appraised to be about $40 million. South Shore will be responsible for demolishing the building at the end of the lease term and restoring the land to its virgin state. Estimated costs of this process are:
Demolition costs $5 million
Environmental clean up and landscaping $5 million
Current interest rates are approximately 8%
Assume that South Shore Slots also uses straight line depreciation or amortization as appropriate...
REQUIRED
Discuss how South Shore Slots should account for the assets and obligations discussed above.