Lifetime Fitness 2011 Annual Report Download - page 78

LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
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Sale-Leaseback Transactions -- In 2003, we financed two of our Michigan centers pursuant to the terms of a sale-
leaseback transaction that qualified as an operating lease. Pursuant to the terms of the lease, we agreed to lease the
centers for a period of 20 years. At December 31, 2011, the future minimum lease payments due under the lease
amounted to $62.5 million.
On August 21, 2008, we, along with a wholly owned subsidiary, entered into a Purchase and Sale Agreement (the
“Purchase Agreement”) with Senior Housing Properties Trust (“Senior Housing”) providing for the sale of certain
properties to Senior Housing in a sale-leaseback transaction. The properties are located in Alpharetta, Georgia,
Allen, Texas, Omaha, Nebraska and Romeoville, Illinois (the “Properties”), and were sold to Senior Housing for
$100.0 million. Pursuant to the terms of a Lease Agreement (the “Lease”) between our subsidiary and SNH LTF
Properties LLC (“SNH”), the subsidiary will lease the Properties from SNH. The lease has a total term of 50 years,
including an initial term of 20 years and six consecutive renewal terms of five years each. Renewal options may
only be exercised for all the Properties combined, and must be exercised no less than 12 months before the lease
term ends. The initial rent will be approximately $9.1 million per year, increased after every fifth year during the
initial term and the first two renewal options, if exercised, by an amount equal to 10% of the rent paid in the
calendar year immediately before the effective date of the rent increase. During the last four renewal terms, rent will
be the greater of (i) 110% of the rent paid in the calendar month immediately before the renewal term commences or
(ii) fair market rent, as mutually agreed by the parties or determined by a mutually agreed upon independent third
party appraiser. The lease is a “triple net” lease requiring our subsidiary to maintain the Properties and to pay all
operating expenses including real estate taxes and insurance for the benefit of Senior Housing. Pursuant to the terms
of a Guaranty Agreement, we have guaranteed our subsidiary’s obligations under the Lease. We, or a substitute
guarantor, must maintain a tangible net worth of at least $200.0 million. At December 31, 2011, the future minimum
lease payments due under the lease amounted to $180.7 million.
On September 26, 2008, a wholly owned subsidiary sold certain properties to LT FIT (AZ-MD) LLC, an affiliate of
W.P. Carey & Co., LLC (“W.P. Carey”). The properties are located in Scottsdale, Arizona and Columbia, Maryland
(the “Properties”), and were sold to W.P. Carey for approximately $60.5 million. Pursuant to the terms of a Lease
Agreement (the “Lease”) between our subsidiary and W.P. Carey, our subsidiary will lease the properties from W.P.
Carey. The Lease has a total term of 40 years, including an initial term of 20 years and four consecutive automatic
renewal terms of five years each. Renewal options may only be exercised for all the Properties combined, and are
automatically exercised if notice is not provided to W.P. Carey 18 months before the lease term ends. The initial rent
will be approximately $5.7 million per year, increased after every year during the initial term and each year of any
renewal option, if exercised, by an amount equal to 2% of the rent paid in the calendar year immediately before the
effective date of the rent increase. The Lease is an “absolute net” lease requiring our subsidiary to maintain the
Properties and to pay all operating expenses including real estate taxes and insurance for the benefit of W.P. Carey.
Pursuant to the terms of a Guaranty and Suretyship Agreement, we have guaranteed the subsidiary’s obligations
under the Lease. At December 31, 2011, the future minimum lease payments due under the lease amounted to
$120.8 million.
We account for the sale-leaseback transactions as operating leases in accordance with the applicable accounting
guidance. The gains we recognized upon completion of the sale-leaseback transactions, a total of $7.4 million, have
been deferred and are being recognized over the lease term.
Purchase Commitments — We contract in advance for land purchases and construction services and materials,
among other things. The purchase commitments were $71.0 million, $29.3 million and $44.6 million at
December 31, 2011, 2010 and 2009, respectively.
Litigation — We are engaged in proceedings incidental to the normal course of business. Due to their nature, such
legal proceedings involve inherent uncertainties, including but not limited to court rulings, negotiations between
affected parties and governmental intervention. We have established reserves for matters that are probable and
estimable in amounts we believe are adequate to cover reasonable adverse judgments not covered by insurance.
These reserves are not material to our consolidated financial statements. Based upon the information available to us