Case 00-06

Who?s Paying the Rent?

Fashions R Us is an upscale retailer that offers high-end fashion products and excellent customer service to its affluent customers. Fashions R Us normally operates as an anchor tenant in major shopping malls. Due to Fashions R Us? unprecedented success in attracting customer traffic to malls in which it locates, landlords often offer favorable lease terms and other benefits to attract Fashions R Us to a particular location. Fashions R Us is considering expanding into Gotham City. Donald Tromp & Sons, a successful Gotham City landlord, has put together an attractive package designed to entice Fashions R Us to locate its Gotham City store in Tromp & Sons?s new mid-town mall. The terms of the deal are as follows:

? Fashions R Us receives title to the shell of a building and land from Tromp & Sons. The fair value of this property is $15 million.

? Fashions R Us receives $25 million from Tromp & Sons to partially offset the remaining build-out costs of $30 million.

? Fashions R Us is not responsible for paying rent.

? As there are no rent payments, a formal lease does not exist. There is, however, an operating agreement that specifies (among other things) that Fashions R Us will operate the location as a typical Fashions R Us store, under the Fashions R Us name with minimum square footage and minimum store hours for a period of 20 years.

? Fashions R Us retains title to the building after the operating agreement expires.

? If Fashions R Us breaks the operating agreement, Tromp & Sons has an option to repurchase Fashions R Us?s real estate interest for fair market value less the unamortized cost of the $25 million cash incentive.

After examining the terms of the agreement offered by Tromp & Sons, Fashions R Us management has agreed to locate its new Gotham City store in Tromp & Sons?s mid-town mall.

Required:

? How should Fashions R Us account for the proposed agreement with Donald Tromp & Sons?

Case 00-06 Who's Paying the Rent? Fashions R Us is an upscale retailer that offers high-end fashion products and excellent customer service to its affluent customers. Fashions R Us normally operates as an anchor tenant in major shopping malls. Due to Fashions R Us' unprecedented success in attracting customer traffic to malls in which it locates, landlords often offer favorable lease terms and other benefits to attract Fashions R Us to a particular location. Fashions R Us is considering expanding into Gotham City. Donald Tromp & Sons, a successful Gotham City landlord, has put together an attractive package designed to entice Fashions R Us to locate its Gotham City store in Tromp & Sons's new mid-town mall. The terms of the deal are as follows: Fashions R Us receives title to the shell of a building and land from Tromp & Sons. The fair value of this property is $15 million. Fashions R Us receives $25 million from Tromp & Sons to partially offset the remaining build-out costs of $30 million. Fashions R Us is not responsible for paying rent. As there are no rent payments, a formal lease does not exist. There is, however, an operating agreement that specifies (among other things) that Fashions R Us will operate the location as a typical Fashions R Us store, under the Fashions R Us name with minimum square footage and minimum store hours for a period of 20 years. Fashions R Us retains title to the building after the operating agreement expires. If Fashions R Us breaks the operating agreement, Tromp & Sons has an option to repurchase Fashions R Us's real estate interest for fair market value less the unamortized cost of the $25 million cash incentive. After examining the terms of the agreement offered by Tromp & Sons, Fashions R Us management has agreed to locate its new Gotham City store in Tromp & Sons's midtown mall. Required: How should Fashions R Us account for the proposed agreement with Donald Tromp & Sons? Copyright 1999 Deloitte Development LLC All rights reserved