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25 (1948). Under the terms of the “lease”, payments are to be
made over a 15-year period, beginning in May 1992, and consist of
monthly payments of $3,821.70. In determining the monthly
payment, the cost of construction, $272,237.26, was amortized
over a 15-year period at a 15-percent interest rate. The rents
have no ascertainable connection to the economic value of the
property but instead are related to a fixed interest return on
the advances or costs of constructing the property. This is
consistent with a financing arrangement, not a lease.
The Option To Purchase
A repurchase provision of a sale-leaseback transaction often
serves the same function as a loan when the repurchase price is
geared to the unamortized principal advanced by the “lessor”.
See Sun Oil Co. v. Commissioner, supra. In this case, Benavidez
has the absolute right to purchase Severo’s and the liquor
license during the final 60 months of the term of the “lease”.
If the option is exercised, the purchase price of Severo’s is the
remaining balance due from Benavidez to Guaderrama plus an amount
equal to 25 percent of the unpaid balance. Thus, the option to
purchase is directly related to the unpaid balance, not to the
fair market value of the property. If Benavidez exercises the
option 1 month before the 15-year term ends, he can purchase
Severo’s for approximately $4,700, nowhere near the fair market
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