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What is a Sublease?

Written by Debtbook Team | Apr 1, 2024 3:51:21 PM

How do subleases work?

Sometimes, municipalities enter into a lease for an underlying asset and, either simultaneously or at a later date, sublease part or all of that underlying asset to a third party. A lease and sublease with the same party is a lease-leaseback. 

Subleases involve three parties:

  • The original lessor
  • The original lessee, who is the lessor in the sublease
  • The sublessee
In a sublease, the original lessor does not change how they account for the lease. They maintain normal guidance.

The original lessee becomes the lessor for the sublease transaction. They account for the sublease as a separate contract.

As a result, they treat the original contract with the original lessor the same, acting as the lessee. For the new sublease, they act as the lessor. 

These contracts do not offset each other. Additionally, disclosures for each contract are made separately. They are not to be treated as one contract for disclosure purposes.

Example:

A municipality may lease an entire office building from a lessor. The municipality doesn't use the entire building, so at some point, it may decide to lease the unused portion to some other organization.A lease can be for any term, but a lease must have a term over a definite period of time with a particular starting and ending date.

What’s important here?

Sometimes, municipalities enter into a lease for an underlying asset and, either simultaneously or at a later date, sublease part or all of that underlying asset to a third party. GASB 87 requires separate accounting and disclosures for the sublease as the original lease. The lessee/sub-lessor should account for the original contract in which they are the lessee, as well as the separate sublease where they are the lessor.
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