Sears 2015 Annual Report Download - page 94

Seritage will be required to provide notice and make a lease termination payment to Holdings equal to the greater of
an amount specified in the Master Leases or an amount equal to 10 times the adjusted€earnings before interest, taxes,
depreciation, and amortization attributable to such space within the Holdings main store, which is not attributable to
the space subject to the separate 50% recapture right discussed above, for the 12-month period ending at the end of
the fiscal quarter ending immediately prior to recapturing such space. The Master Leases also provide Holdings
certain rights to terminate the Master Leases with respect to REIT properties or JV properties that cease to be
profitable for operation by Holdings. In order to terminate the Master Lease with respect to a certain property,
Holdings must make a payment to Seritage or the JV of an amount equal to one year of rent (together with taxes and
other expenses) with respect to such property. Such termination right, however, is limited so that it will not have the
effect of reducing the fixed rent under the Master Lease for the REIT properties by more than 20% per annum.
Also, in connection with the Seritage transaction and JV transactions, Holdings assigned its lease agreements
with third party tenants for REIT properties and JV properties to Seritage and each of the JVs, respectively, and also
assigned rental income from Lands' End for REIT properties and JV properties to Seritage and each of the JVs,
respectively.
The initial amount of aggregate annual base rent under the Master Leases is $134 million for the REIT
properties and $42 million for the JV properties, with increases of 2% per year beginning in the second lease year
for the REIT properties and in the fourth lease year for the JV properties. Holdings recorded rent expense of $68
million in 2015 in cost of sales, buying and occupancy on the Consolidated Statement of Operations. Rent expense
consisted of straight-line rent expense offset by amortization of a deferred gain on sale-leaseback, as shown in the
table below.
2015
millions Kmart
Sears
Domestic
Sears
Holdings
Straight-line rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20 $100 $120
Amortization of deferred gain on sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . (11)(41)(52)
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9$59 $68
We accounted for the Seritage transaction and JV transactions in accordance with accounting standards
applicable to real estate sales and sale-leaseback transactions. We determined that the Seritage transaction qualifies
for sales recognition and sale-leaseback accounting. Because of our initial ownership interest in the JVs and
continuing involvement in the properties, we determined that the JV transactions, which occurred in the first quarter
of 2015, did not initially qualify for sale-leaseback accounting and, therefore, accounted for the JV transactions as
financing transactions and, accordingly, recorded a sale-leaseback financing obligation of $426 million and
continued to report the real property assets on our Condensed Consolidated Balance Sheets at May 2, 2015. Upon
the sale of our 50% interest in the JVs to Seritage, the continuing involvement through an ownership interest in the
buyer-lessor no longer existed, and Holdings determined that the JV transactions then qualified for sales recognition
and sale-leaseback accounting, with the exception of four properties for which we still have continuing involvement
as a result of an obligation to redevelop the stores for a third-party tenant and pay rent on behalf of the third-party
tenant until it commences rent payments to the JVs.
With the exception of the four properties that have continuing involvement, in accordance with accounting
standards related to sale-leaseback transactions, Holdings recognized any loss on sale immediately, any gain on sale
in excess of the present value of minimum lease payments immediately, and any remaining gain was deferred and
will be recognized in proportion to the related rent expense over the lease term. Holdings received aggregate net
proceeds of $3.1 billion for the Seritage transaction and JV transactions. The carrying amount of Property and
equipment, net and lease balances related to third-party leases that were assigned to Seritage and the JVs was $1.5
billion at July 7, 2015, of which $1.3 billion was recorded in our Sears Domestic segment and $175 million in our
Kmart segment. Accordingly, during the second quarter of 2015, Holdings recognized an immediate net gain of $508
million within gain on sales of assets on the Consolidated Statement of Operations for 2015, comprised of a gain for
the amount of gain on sale in excess of the present value of minimum lease payments, offset by a loss for properties
where the fair value was less than the carrying value and the write-off of lease balances related to third-party leases
that were assigned to Seritage and the JVs, as shown in the table below.
SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
94