What Is A Recapture Agreement

A winback clause refers to a common tenancy clause in commercial real estate that allows the landlord to terminate a lease and retain ownership of a property. A percentage lease allows the landlord to invoke a winback clause if the income of the tenant corporation falls below a certain level. This is the triggering event. In the case of a shared property such as a shopping mall, a landlord will pick up a property in the hope of being able to bring in another tenant with higher incomes. This helps the landlord`s bottom line and can also bring extra business for the landlord`s other tenants. A salvage clause refers to a provision in a contract that allows the seller of an asset to take back the asset under certain conditions. This is a common component of commercial real estate leases, as opposed to residential real estate leases. In such a lease, the clause gives a landlord the right to repossess property before a lease expires. The details of the clause are negotiated between the landlord and the tenant and included in the lease. The most important detail of a recapture clause is what is called the trigger – the event that allows an owner to initiate the reconquest. If a business is required to add a deduction or credit from a previous year to its income, a new application follows. For example, if a company sells an asset and has to recover (add) part of the depreciation, this is called depreciation recovery.

The first step in assessing depreciation recovery is to determine the cost basis of the asset. The initial cost basis is the price paid for the acquisition of the asset. The adjusted cost base is the initial cost base minus authorized or authorized depreciation expenses. Suppose work equipment is purchased for $10,000 and the depreciation costs are $2,000 per year. After four years, the adjusted cost base is $10,000 ($2,000 x 4) = $2,000. A common trigger is a tenant`s intention to allocate the property to a third party via subletting. For this reason, the reconquest clause is closely linked to the lease assignment clause, and the two are usually negotiated together. Landlords prefer to leave the wording of a win-back clause vague to allow for flexibility when a tenant asks for permission to assign. Depreciation is recovered if the equipment is sold profitably.

If the equipment sells for $3,000 after four years, the business will have a taxable profit of $3,000 at $2,000 = $1,000. It is easy to believe that a loss arose from the sale, as the asset was bought for $10,000 and sold for only $3,000. However, gains and losses are realized from the adjusted cost base, not from the initial cost base. In this case, the company must report a recovered profit of $1,000. If a tenant business is doing badly and intends to close, it may try to lease the rented property to another business instead of defaulting on its lease with the landlord. However, the landlord would generally prefer to initiate a new lease directly with the new business. If the first tenant informs the landlord of his intention to transfer the property to the new corporation, the landlord can invoke the reconquest clause of the lease. Depreciation is the gain on the sale of depreciable capital assets that must be reported as income. Impairment is measured when the selling price of an asset exceeds the tax base or adjusted cost base. The difference between these figures is thus “reconquered” by being declared as income. .