FACT PATTERN:

You have accepted an offer at a CPA firm. After a week of training on the firms various procedures, systems and software you are finally ready to get to work. As you settle in to your desk you open up your task management software and email and begin to sort out the various tasks assigned to you by senior staff.

TASK 3:

Client is bio-tech company in the Sorrento Valley area making stents. They have increased demand and would like to increase capacity. However, they also need to raise working capital. The CFO has proposed a deal in which the company would sell their massive facility and then lease it back. The idea is to get a large amount of funds upfront and then pay lease payments over time as increased revenues occur. The CFO also thinks that they could arrange a clause in the lease in which at the end of the lease the company could buy the building back below market value.

The CFO would like your input on how to structure the lease agreement so that it achieves their objective of increasing their cash position but also in such a way that has the least negative impact to their asset to debt ratios. Explain what the material, critical terms of the lease would be and how it would need to be structured to achieve this goal. Also discuss the alternative and how that would impact cash flow, the balance sheet and accompanying ratios.