compare the results of the present value of a 6 000 ordinary annuity at 10 percent i 613216

Company S sells a property to Company B for £100,000,000 and leases it back on the following terms:

Rental for years 1 to 5

£3,900,000 per annum

Rental for years 6 to 10

£5,875,000 per annum

Rental for years 11 to 15

£8,830,000 per annum

Rental for years 16 to 20

£13,280,000 per annum

Rental for years 21 to 25

£19,970,000 per annum

Rental for years 26 to 30

£30,025,000 per annum

Rental for years 31 to 35

£45,150,000 per annum

Rental thereafter

open market rent

Rentals are payable annually in advance.

Company S has a call option to buy back the property at the following dates and prices:

At the end of year 5

£125,000,000

At the end of year 10

£150,000,000

At the end of year 15

£168,000,000

At the end of year 20

£160,000,000

At the end of year 25

£100,000,000

Company B has no right to put the property back to Company S.

An analysis of the economics of this deal suggests that whilst Company S has no legal obligation to repurchase the property, there is no genuine commercial possibility that the option will not be exercised. This is because the rentals and option prices are structured in such a way as to give the buyer of the property a lender’s return whilst, at the same time, there is no commercial logic for the seller not to exercise the option at year 25, if not earlier. Exercising the option at the end of year 25 will mean that Company S will regain ownership of the property and will have had the use of the £100,000,000 at an effective rate of approximately 8.2% per annum; failure to exercise the option will mean additional lease obligations of £375,875,000 over the ten years from years 25 to 35, followed by the obligation to pay market rents thereafter.