Straight line leases workout. Here we have a 10-year lease and the lease increases by 3.5% each year. So, the first thing we have to do is calculate the economic lease payments which is the actual cash that the REIT will take in upon payment of the rent.

Copy that up to year 10, we see the 3.5% increase. Now under GAAP, the lease is recognized as follows. The total lease payments for the life of the lease are calculated. That would be the sum of all 10 payments.

The annual lease amount recognized for GAAP is the total of the lease payments divided by the lease term, which is 10 years. So, for GAAP purposes, each year the amount recognized is 391.9.

Now, this obviously varies from the economic lease recognition. It has created an amount that is greater than the economic reality by 57.8. If we copy this across, what we see is that this holds true for the first half of the lease, and then in the second half of the lease, the economic reality is actually greater than the GAAP reality, thereby creating an underage. If we total the sum of the overstated and understated amounts, we get zero. And this is true of every lease. The economic reality and the GAAP reality over the life of the lease will always be the same. It's just that in each year we have to assess whether or not we have overstated or understated our earnings.