We're now going to deal with the lease liability. The first thing I'm gonna do, just 'cause we have a bunch of zeros out here and I want to make sure that we are following everything, I have my formulas put out here to the right and I'm just gonna go and hide some columns that we don't need right now.

So for the lease liability, the first thing we have to do is go back and revisit what's actually happening with this sale lease back. If we go back to the LBO tab, what we see that's happening here is we have this ability to structure this transaction as a sale lease back whereby the entity owning the assets which is the target company, would effectively get the opportunity to revalue those assets. So the first thing it would allow the company to do is to revalue these assets. So it has these assets on the books which are typically real estate assets. And this typically happens for retailers and other companies that own real estate or properties that are not businesses that are driven by real estate transactions such as rental properties and the like. So this is a retailer in the clothing business that has valuable real estate. Therefore it's going to unlock that value by selling those assets and then leasing the space back so that obviously it doesn't have to close those stores. So the first thing that's happening here is that we have an assumption for the PP&E valuation uplift. So this is the revaluation of the property. And then we have an assumption what the debt equivalent of the leased back assets, which will be the lease liability on the company's balance sheet. And then we have some terms for the lease that will effectively be in place going forward which is to say that it'll be a 25 year lease with an implied interest rate of 9%. So when this financial structure choices turn to three, what's gonna happen is the assets get revalued and we get a bridge loan in place. Now the bridge loan is simply plugging the terms of the transaction according to the sources and uses. In other words, whatever the terms of the deal were, that's what the bridge loan is gonna plug. However, once the real estate is revalued and then sold, the company then can make a gain on this transaction and that gain will come back to the owners of the company in the form of a dividend. So when this is turned to three, let's just tackle first the financing part of this transaction. When this is turned to three, we have a lease liability here that's been calculated and I'll put that formula out to the right as well so we can take a look at it. It basically says that if that capital structure has been chosen, then the first thing we're gonna do is we're gonna take the balance sheet assets in I 11 and that's the property plant and equipment. And we're going to revalue that or gross that up by 40%. And once that happens, we can then apply to that the loan to value. This will tell us what the lease liability is going to be on that property. So how will this factor into the capital structure? Well, again, the first thing that's gonna happen is we're gonna have a bridge loan in place that is effectively going to replace the second lien loan. So the second lien loan in the sale leaseback example is going away and we're simply getting plugged with a bridge loan. However, it's clear to see that there is a difference between the bridge loan and the value of the lease liability. And that gap between the value of the lease liability and the bridge loan is a form of profit to the owners of the company and more specifically to the sponsors. This is sort of an immediate gain or an immediate return for the sponsors of the deal. The first thing we're gonna do is we're going to just make sure that on our debt page, that we are reflecting that once the bridge loan is repaid, as of the end of the year, that we're going to have a lease liability come on the books and the lease liability is a financial lease. So it'll sort of mirror the way debt works. So for the lease liability for the ending amount, we could to be consistent go and link to our balance sheet but we didn't even have it on the balance sheet as of the combo. And the reason why is that the lease liability has not been set up yet as of the close of the transaction. It takes this period of time to properly revalue the assets to enter into the transaction, to sell the assets, and establish the loan to value and all that. So that has to happen over this period of time where the bridge loan is helping out. And so the proper thing to do here would be to simply hard code a zero in here. And of course we're coding it and showing it as a hard code so that we know that this is effectively been plugged. So that's gonna become our beginning balance. Now, if we are in the year that the bridge loan is paid and the sale lease back takes place, if we are in the same year, then we wanna show an issuance of the lease liability. So I'll link that to my lease liability or bridge redemption date and I'll anchor that. If that's the case, we want to show the issuance of the lease liability the creation of the lease liability, that's going to be reflected in the 709.1. And if we're not in that period that matches the redemption of the bridge, the establishment of the lease, we want a zero. Now it's important to know here that what we're not gonna show in this model are some of the complexities of revaluing assets, particularly in a stock transaction where we're buying the equity. In that type of a transaction, you're gonna have to revalue the assets and you're gonna have to show a deferred tax liability. So this model for simplicity, we're not gonna do all of that, but in reality that is what would happen. So we have issuance of 709.1 and now because the lease liability is not a part of our capital structure here, it's working differently from the way the debt works to calculate the interest on the lease liability. What we're doing here is we're essentially calculating kind of accrual. There are several components to leasing under a financial lease. There's the payment of the interest and then there's the sort of the built in or inherent depreciation or use of the asset as well. So there's a financing component and then there's sort of a use or depreciation component. The interest here that we're calculating it's gonna be equal to the lease interest rate and that was given to us as a separate assumption on the LBO page anchored times the beginning balance of the lease. And we're gonna keep this as positive for right now. The reason why is because this interest is, again, only part of the actual payment that is going to be made. The payment we're gonna show reflect as a negative. And so the payment is gonna be calculated using the PMT function in Excel. And this is similar to how you would calculate a mortgage payment or, you know, a financial lease payment. So what that's going to be is equal to PMT of the terms of the lease. So the first thing that we want here is the rate. The rate is the 9% and we're gonna anchor that. The next thing we want are the lease years. And in this case we have yearly payments. So we can show the actual lease terms in years. So that's gonna be F 13 and we'll anchor that. Now it's asking for the present value of the lease. The present value of the lease is what we calculated in D 31 and that's equal to the 709.1. And again, I'll anchor that. And the last thing it's asking for is the future value of the lease and the future value of the lease is zero. It is showing me the payment as an outflow, which is what we want. The problem is, is that we want to link this payment to the period that we're in because we shouldn't have a lease payment in this first year because the lease didn't come on the books until the very end of the year. So I mean, we already paid full interest on the bridge loan. We shouldn't have to make a payment on the lease if we are effectively taking occupancy at the end of the year. So what I wanna do is I wanna wrap this in an if statement. If there is an issuance of the lease liability in J 66. So if that's greater than zero, that means that the lease liability is coming on at the end of the year and I don't need a payment on that lease. And this is a little simple, but again, this is for teaching purposes so we're just showing you how this works. Lease liability is coming on at the end of the year. I don't need a payment in that year, so I'm showing a zero. And otherwise if there is no issuance which is what'll happen for the remainder of the 24 years of the lease, then we'll show the payment. We'll show the payment. What this means in terms of the lease ending balance. If we think about this now, right, when you have a mortgage, when you have a, you know, a lease, financial lease obligation, what's happening to the balance of the lease? The balance of the lease is like the principle. The principle does not go down by the amount of interest. The interest is what you pay on the financing portion of it. So our lease liability is only going to go down by the difference between the total payment of the lease and the actual interest. The balance of the financial lease is only going to go down by the amount of that effectively gap between the payment and the interest and this is the reason why we left our interest positive. So my ending balance on the lease is equal to the sum of all of these items. All of these items. So we'll see how this plays out in the next year when we have something other than zeros to look at. So if I copy this over one year, what you'll see is that my beginning balance carries over into the next year and now I have my full first year leasing this asset. There is no new issuance. I have interest calculated on the beginning balance according to that 9% at 63.8. My payment in this lease calculator that I have using the payment function is 72.2. So what's happening is, is that the ending lease balance, the lease is being reduced by that difference between the 72.2 of my total payment and the 63.8 of which was interest. So that difference of, you know, roughly I guess 8.4 is what my ending lease is being decreased by. And again, now we can go back up to our bridge loan, if we copy this over. What we see with the bridge loan is that the bridge loan is has been paid down because we are in the correct year and therefore I'm carrying no bridge loan balance into 2017. We will take a look at the next component of the sale leaseback, which is the dividend or the gain from this transaction at the end of the model.