EXPERT ANALYSIS CONCERNING

PREPAID RENT AND SECTION 467 LOANS1

Timothy Michael Toy
Law Offices of Timothy M. Toy
Mendham, New Jersey
tmtoy@tmtoylaw.com
908.672.1275

April 8, 2018

Contents
1. Expert Analysis; Summary of Conclusions .......................................................................... 2
2. Tower Transaction: Case Study ........................................................................................... 4
3. Tower Transaction: Documentation ................................................................................... 5
4. Tower Transaction: Brief Description ................................................................................. 5
5. Tower Transaction: Summary of Relevant Master Lease Provisions ................................. 7
· Master Lease, Section 11(a): ............................................................................................... 7
· Master Lease, Section 11(e):............................................................................................... 7
· Master Lease, Section 11(f): ............................................................................................... 7
· Master Lease, Section 39(a)(1) (lessor tax assumptions): .................................................. 8
· Master Lease, Section 39(a)(2) (lessor covenant): ............................................................. 8
6. True Lease Under the Tax Code .......................................................................................... 9

1
Substantial portions of this analysis have been freely copied and adapted to this analysis from
an expert analysis of section 467 loans generally submitted in an adversary proceeding relating to power
plant leases in the 2003 Chapter 11 proceeding for Mirant Corporation in the Northern District of Texas,
Fort Worth Division. Case 04-04283-dml Doc 124-2 Filed 03/04/05 Entered 03/04/05 16:24:36 Pages 1
through 33. FSB 224 is a copy of the as-submitted expert report.

Item GSB 401 at www.genonsourcebook.com has a docket sheet for the adversary proceeding
that has retained links to the PACER data base: see docket item 125. A PACER account is needed to access
the items linked on GSB 401.

Law Offices of Timothy M. Toy

7. Section 467 Provisions ...................................................................................................... 10
8. Intent of the Parties .......................................................................................................... 10
9. Impact of Rent Allocation Provisions ................................................................................ 10
10. Discussion of Section 467 ................................................................................................. 11
11. Mandatory Accrual Basis Accounting ............................................................................... 12
12. Imbedded (Deemed or Constructive) Loans ..................................................................... 13
13. Full Scale Implementation of the "Rent Levelizing" Rules ................................................ 15
14. Full Scale Implementation of the "Deemed Loan" Rules.................................................. 15
15. Leases Having Inadequate Stated Interest—Proportional Rent Methodology ................ 16
16. Nature of Section 467 Deemed Loan Rules ...................................................................... 18
17. Additional Topics for Shari'a Analysis ............................................................................... 18
ANNEX A: 2005 COMMUNICATION TOWERS LEASE TRANSACTION ............................................ 1

1. Expert Analysis; Summary of Conclusions

I have prepared this expert analysis of the May 2005 SprintNextel/Global Signal tower
transaction (the "Tower Transaction")2 with a view to (i) describing the genesis and nature of the
section 467 loan aspect of the transaction, and (ii) expressing my opinion as to (1) whether or not
the section 467 loan creates legal obligations on the part of the lessor to repay to the lessee any
portion of the section 467 loan, and (2) whether or not the section 467 loan should otherwise be
regarded as a commercial loan. The provisions of the Tower Transaction documentation
applicable to the section 467 loan illustrate a common approach to setting forth contractual
provisions that implement the requirements of section 467 of the U.S. Internal Revenue Code
(the "Tax Code") and applicable regulations promulgated by the U.S. Department of the Treasury
when a substantial prepayment of rent is made under a particular lease. In the Tower
Transaction, one hundred percent (100%) of the rent for a 32-year lease—USD $1.2 billion—was
prepaid in full at lease inception.

The purpose of this analysis is to enable a shari'a advisor to make a determination

whether or not a lease (ijarah) that is otherwise shari'a compliant would be rendered non-
compliant by a very substantial prepayment of rent under a lease and the presence of section
467 loan provisions in the documentation for the lease. The initial questions to be presented to
the shari'a advisor can thus be stated as follows: first, is a very substantial prepayment of rent
prohibited by Islamic law? Second, does the existence of interest expense and interest income
solely for the United States Federal income tax purposes involve the payment or receipt of

2
Contribution, Lease and Sublease Transaction between SprintNextel Corporation and Global
Signal, Inc. Relating to Approximately 6,600 Wireless Communications Tower Sites and Related Towers
and Assets. See Part 4, "Tower Transaction: Brief Description," below.

Law Offices of Timothy M. Toy 2

interest (riba) that is prohibited by Islamic law?3 The purpose of this expert analysis is to provide
my opinion as to the legal nature and commercial effect of a section 467 loan under United States
law in the context of a prepayment in full of all rent due under a lease of tangible property.4

To summarize the more detailed discussion set forth later in this analysis, the Master
Lease provides for the lessee to make a single lump sum payment of Rent in respect of the entire
32-year lease term. The Master Lease expressly provides that, once the agreed Rent has been
paid, the payment is non-refundable. Except in certain enumerated circumstances relating to
non-conforming towers and tower sites, the Master Lease does not contain any provision for the
"repayment" of any amount by the lessor to the lessee. While the Master Lease recognizes that
Rent has been paid in advance of the periods to which it is treated as "allocated" under the
Master Lease, the Master Lease provides that Rent was, as a commercial matter, payable and
paid at lease inception, irrespective of the allocation provisions of the Master Lease. The Master
Lease does not envision that, upon a default under the Master Lease or otherwise, Rent would
be refunded to the lessee to account for the fact that the aggregate amount of Rent through the
date of an early termination of the Master Lease exceeded rent "allocated" to periods prior to
termination. Nor is there any other required payment by the lessor to the lessee in the event of
the premature termination of the Master Lease or any other adjustments to amounts payable
under the Master Lease to account for any unamortized allocated Rent. Simply stated, there is
no mechanism in the Master Lease which requires or contemplates the commercial repayment
to the lessee of any "loan" the lessee might be deemed under the Tax Code to have made to the
lessor.

The Master Lease does contain certain sections that refer to the intent of the parties that
there shall "be considered to exist a loan . . . for purposes of Section 467 of the Code." With
regard to these provisions, however, it is my opinion that such deemed "loan" is a creation solely
of the current tax law accounting provisions governing leases and does not represent a "loan" in
any commercial sense. A commercial law loan requires the advance of funds by one party to
another with a fixed obligation for the repayment of the amount advanced. A rent prepayment,
under terms where such rent is irrevocably paid, as is the case with this Facility Lease, does not
in any way create a repayment obligation. Accordingly, in such a case a commercial loan cannot

3
It is likely that a favorable determination as to shari'a compliance will require relegating the
Section 467 loan mechanics and related provisions to a separately executed tax matters agreement.

4
Of necessity, any shari'a determination addresses a particular structure, transaction and set of
documentation. Any shari'a conclusion based on this analysis would, therefore, be general, illustrative
and advisory, but not binding. It is nonetheless the hope of the author that such conclusion would indicate
the manner in which shari'a advisors might approach the topics of substantial rent prepayment and the
section 467 loan and provide a good indication of the position and rationale of shari'a advisors with
respect to ijarah that include substantial prepayments of rent and section 467 loans. If a substantial rent
prepayment and the Section 467 Loan provisions are found to be shari'a compliant, a U.S.-style operating
lease will raise a number of other considerations under Islamic law. Part 17 below, "Additional Topics for
Shari'a Analysis," is a listing of a number Islamic law issues that would likely need to be addressed as a
commercial matter in any U.S. prepaid true lease that endeavors to be shari'a compliant.

Law Offices of Timothy M. Toy 3

exist. Instead, the provisions of Section 11(f) of the Master Lease and the "Section 467 Loan"
referred to therein are simply an agreement of the parties as to the intended characterization
for federal income tax purposes, in accordance with the tax rules existing in 2005 when the lease
was created, of the underlying commercial transaction. In my view, the language in the Facility
Lease regarding Section 467 must be interpreted in the context of the existing tax law regime and
with a view and understanding of the practices and conventions of the equipment leasing
industry. So viewed, it is my belief that the parties did not intend to create a commercial law loan
obligation.

The Tax Code has since 1984 recognized that many common commercial transactions can
be and are commonly structured without any regard to time value of money principles. Pursuant
to authority granted to it in the Tax Code, the Internal Revenue Service ("IRS") has promulgated
rules which require many common commercial transactions to be accounted for on a basis which
creates, solely for tax purposes, imbedded, hypothetical, loan transactions. The effect of these
"imbedded loans" does not in any way affect or change the commercial law obligations of the
parties to the transaction; the effect of such loans is solely for purposes of tax accounting for the
income or deductions of each of the parties to the transaction in a manner deemed to be
consistent with the IRS's application of time value of money principles. The "Section 467 Loan"
referred to in the Master Lease documentation is simply an example of such a creation of the tax
law and has no commercial law effect.5

In conclusion, the deemed "Section 467 Loan" does not represent an advance of money
in any commercial law sense and is never, under the terms of the Master Lease, required to be
repaid in any commercial law sense. It cannot be regarded in any way as a commercial law debt
obligation.

2. Tower Transaction: Case Study

Annex A hereto is a detailed narrative and analytical case study of the Tower Transaction.
The Tower Transaction has been selected for analysis for a number of reasons:

(i) the transaction involved a prepayment at lease inception of 100% of the rent
due under the lease;

(ii) the transaction was structured as a true lease (not merely a financing) for U.S.
Federal income tax purposes;6

5
The placement of Section 467 in the Tax Code is itself illustrative of this point: Section 467 was
codified in Subchapter E, "Accounting Periods and Methods of Accounting", Part II, "Methods of
Accounting," Subpart C, "Taxable Years for Which Deductions Taken." This placement supports the
conclusion that the Section 467 loan is an artifact of U.S. Federal tax accounting rules.

6
A lease that is a true lease for U.S. Federal income tax purposes corresponds most closely to an
operating ijarah. A lease that is of the ijarah wa iqtina type (a lease that concludes with legal title to the

Law Offices of Timothy M. Toy 4

 (iii) the transaction involved substantial non-building infrastructure assets;

(iv) the documentation for the transaction is available in public filings made by the
parties with the U.S. Securities and Exchange Commission (SEC) via the SEC's Electronic
Data Gathering, Analysis and Retrieval (EDGAR) 7 system;

(v) the transaction was large (the upfront rent payment approximated USD $1.2
billion) and the lease was long (32 years); and

(vi) the lessee, GSI, was, in May 2005, a publicly-traded real estate investment trust
(REIT).

3. Tower Transaction: Documentation

The principal documentation for the Tower Transaction is: (i) Agreement to Contribute,
Lease and Sublease dated as of February 14, 2005 (the "Transaction Agreement"); and (ii) six (6)
Master Lease and Sublease Agreements, each dated as of May 26, 2005 (each, a "Master Lease").

The Transaction Agreement was filed with the SEC by (a) SprintNextel Corporation
("Sprint") as Exhibit 10 to its Current Report on Form 8-K filed on February 14, 2005, and (b)
Global Signal, Inc. ("GSI") as Exhibit 10.1 to its Current Report on Form 8-K filed on February 14,
20058 The Master Leases were filed with the SEC by GSI as Exhibits 10.1 through 10.6 to GSI's
Current Report on Form 8-K filed on May 27, 20059. A copy of the Transaction Agreement
(without schedules or exhibits) has been extracted from the referenced EDGAR filings and is
available in Microsoft Word format upon request (New York\12167). One of the Master Leases
(Exhibit 10.1) has been similarly extracted and is also available in Microsoft Word format upon
request (New York\12086).

4. Tower Transaction: Brief Description

On May 26, 2005, GSI, Sprint and certain Sprint subsidiaries (the "Sprint Contributors")
closed on the Transaction Agreement. Under the Transaction Agreement, GSI will lease or
operate, for a period of 32 years, 6,553 communications sites and the related towers and assets
(collectively, the "Sprint Towers") from newly formed special purpose entities of Sprint
(collectively, "Sprint TowerCo"), under the Master Leases for which GSI paid approximately $1.2
billion as prepaid rent (the "Upfront Rental Payment") subject to certain conditions, adjustments

leased asset passing to the lessee) would, in most circumstances, not be a true lease for U.S. Federal
income tax purposes. Status as a true lease for U.S. Federal income tax purposes" is discussed further at
Part 6, "True Lease under the Tax Code," below.

7
Direct electronic links to the EDGAR data base will be provided as appropriate.

8
http://www.sec.gov/Archives/edgar/data/1278382/000095013605000880/file002.htm.

9
http://www.sec.gov/Archives/edgar/data/1278382/000095013605003148/file002.htm

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and pro-rations. Certain Sprint entities lease space on 6,342 of the Sprint Towers (as described
below). GSI accounted for this transaction as a capital lease in reflection of the substantive
similarity to an acquisition.

At the closing of the Tower Transaction, Sprint TowerCo entered into a Master Lease with
a wholly owned special purpose entity (the "Lessee") created by GSI. The term of the Master
Lease will expire in 2037 and there are no contractual renewal options. Except for the Upfront
Rental Payment, the Lessee will not be required to make any further payments to Sprint TowerCo
for the right to lease or operate the Sprint Towers during the term of the Master Lease. The Sprint
Contributors currently lease the land under substantially all of the Sprint Towers from third
parties and the Lessee has assumed all of the Sprint Contributors' obligations that arise under
the Sprint Towers ground leases. Additionally, the Lessee is required to pay all costs of operating
the Sprint Towers as well as an agreed-upon amount for real and personal property taxes
attributable to the Sprint Towers. During the period commencing one year prior to the expiration
of the Master Lease and ending 120 days prior to the expiration of the Master Lease, the Lessee
will have the option to purchase all (but not less than all) of the Sprint Towers then leased for
approximately $2.3 billion.

The Lessee is entitled to all revenues from the Sprint Towers during the term of the
Master Lease, including amounts payable under existing Sprint Tower collocation agreements
with third parties. In addition, under the Master Lease, Sprint entities that are part of Sprint's
wireless division (excluding entities acquired in connection with the Nextel merger and the
various Sprint-branded wireless affiliates acquired by Sprint Nextel) have agreed to sublease or
otherwise occupy collocation space (the "Sprint Collocation Agreement") at 6,342 of the Sprint
Towers for an initial monthly collocation charge of $1,400 per tower (the "Sprint Collocation
Charge") for an initial period of ten years. The Sprint Collocation Charge increases each year,
beginning January 2006, at a rate equal to the lesser of (i) 3% or (ii) the sum of 2% and the increase
in the Consumer Price Index during the prior year. The Sprint collocation charge increased in
January 2006 to $1,442. After ten years, Sprint may terminate the Sprint Collocation Agreement
at any or all Sprint Towers, provided, however, that if Sprint does not exercise its termination
right prior to the end of nine years at a Sprint Tower (effective as of the end of the tenth year),
the Sprint Collocation Agreement at that Sprint Tower will continue for a further five-year period.
Sprint may, subsequent to the ten-year initial term, terminate the Sprint Collocation Agreement
as to any or all Sprint Towers upon the 15th, 20th, 25th, or 30th anniversary of the
commencement of the Master Lease.

Subject to arbitration and cure rights of the Lessee's lender, in the event of an uncured
default under a ground lease, Sprint TowerCo may terminate the Master Lease as to the
applicable ground lease site. In the event of an uncured default with respect to more than 20%
of the Sprint Towers during any rolling five-year period, and subject to certain other conditions,
Sprint TowerCo may terminate the entire Master Lease. GSI guarantees the full and timely
payment, performance and observance of all of the terms, provisions, covenants and obligations
of the Lessee under the Master Lease up to a maximum aggregate amount of $200.0 million.

Law Offices of Timothy M. Toy 6

5. Tower Transaction: Summary of Relevant Master Lease Provisions

In connection with this analysis I have reviewed both the Transaction Agreement and the
Master Leases as electronically filed with the EDGAR system. The Transaction Agreement and
the Master Leases are quite similar to hundreds of other long-term facility-type leases that I have
reviewed in my twenty-five years of experience with long-term leases of facilities and large items
of capital equipment.

The relevant provisions of the Master Leases that bear on my conclusion that the section
467 loan is, and was intended by the parties to be, just a creation of the U.S. Federal income tax
law (and solely for purposes of income tax reporting), with no commercial effect:

• Master Lease, Section 11(a):

Lessee will prepay Rent in respect of the Leased Property of each of the
Initial Master Lease Sites for the entire Term as to such Master Lease Site
on the Effective Date… Such Rent… will be specifically allocated to the
periods as set forth in Exhibit H ("ALLOCATED RENT"); provided, however,
that… such allocation of rent… shall in no event fail to qualify for the
uneven rent test provided for in Treasury Regulations Section 1.467-
3(c)(4)… Lessee agrees that, except pursuant to the terms of Sections 4(f)
and 41 and any provision contained in the Agreement to Lease and
Sublease that expressly provides for the same, the Rent [is] … non-
refundable and that Lessee will have no right of abatement, reduction,
setoff, counterclaim, rescission, refund, defense or deduction with respect
thereto.

• Master Lease, Section 11(e):

Notwithstanding that Rent… shall be prepaid in accordance with Section

11(a), the Parties agree that, for Tax purposes only, the Allocated Rent for
each Site shall represent and be the amount of Rent… for which Lessee
becomes liable on account of the use of each applicable Site for each
calendar year, in whole or in part, of the term.

• Master Lease, Section 11(f):

It is the intention of the Parties that the allocation of Rent… to each Rent
Payment Period as provided in Exhibit H constitutes a specific allocation of
fixed rent within the meaning of Treasury regulations Section 1.467-
1(c)(2)(ii)(A), with the effect that pursuant to Treasury regulations Sections
1.467-1(d) and 1.467-2, Lessor and Lessee, on any federal income tax
returns filed by each of them (or on any Tax return on which their income
is included), shall accrue the amounts of rental income and rental expense,
respectively, set forth for each Rent Payment Period in Exhibit H under the

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 caption "Proportional Rent" (the "PROPORTIONAL RENT"). Because Lessee
is prepaying the Rent… in respect of each Site for the entire Term pursuant
to Section 11(a), there shall be considered to exist a loan from Lessee to
Lessor for purposes of Section 467 of the Code with respect to each Site
equal to the amount set forth in Exhibit H under the caption "Section 467
Loan" (the "SECTION 467 LOAN"). Lessor shall deduct interest expense and
Lessee shall accrue interest income, in each case, in an amount equal to
that set forth in Exhibit H under the caption "Section 467 Interest" for the
applicable Rent Payment Period. In no event shall any principal or interest
on any Section 467 Loan be separately payable as such (including upon any
termination of this agreement with respect to a Site), it being agreed and
understood that these items represent characterizations for Tax purposes
only, and in no event whatsoever shall Lessee be entitled to a reduction of,
or offset against, the amounts of Rent… payable pursuant to Section 11(a).

• Master Lease, Section 39(a)(1) (lessor tax assumptions):

(i) for federal income tax purposes, this Agreement will be treated as a
"true lease" with respect to all of the Leased Property, the members of the
Sprint Group will be treated, directly or indirectly through one or more
entities that are classified as partnerships or disregard entities for federal
income tax purposes, as the owners and sublessors of the Leased Property,
and Lessee will be treated (or, if Lessee is a disregarded entity for federal
income tax purposes, the entity treated as the owner of Lessee for federal
income tax purposes) as the lessee of the Leased Property;…

(iii) prepaid Rent… with respect to each Site will be paid under a single
lease subject to Section 467 of the Code and will be characterized in part
as a loan under Section 467 of the Code and Treasury Regulations issued
under such section and the Sprint Group will be entitled to deduct interest
attributable thereto with respect to each Site as set forth in Exhibit H;

• Master Lease, Section 39(a)(2) (lessor covenant):

Lessee, any Affiliate of Lessee, any assignee or sublessee of Lessee, and

any user of the Leased Property will not claim depreciation deductions as
the owner of any of the Leased Property for federal income Tax purposes
during the Term (and thereafter unless Lessee purchases such property
pursuant to Section 36 of this Agreement), with respect to Alterations
financed by Lessee or such assignee, sublessee, or other user, nor will they
take any other action in connection with filing a Tax return or otherwise

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 which would be inconsistent with (i) the treatment of the Sprint Group
Members as the direct or indirect owners and lessors of the Leased
Property for federal income tax purposes, (ii) the Tax Assumptions, or (iii)
Section 11 and Exhibit H of this Agreement.

Also relevant to my analysis are provisions of Section 31 of the Master Lease dealing with
termination of the Master due to default by the parties. Due to the length in Section 31, I will
not set forth the provisions herein but will briefly summarize them. If the lessee defaults, the
lessor may terminate the Master Lease but is not obligated to return any portion of Rent
irrespective of the amount of any unamortized Section 467 Loan, section 31(f). If the lessor
defaults, the lessee may terminate the sublease portion of the Master Lease (with the lessor
returning its possessory rights as lessee) and/or purchase title to the Leased Property for a
nominal sum (USD $100), but in no event would the lessor be obligated to return any portion of
Rent, section 31(b).

6. True Lease Under the Tax Code

Section 467 of the Tax Code is, by its terms, applicable to agreements that are leases of
tangible property. Whether or not an agreement is a lease for federal tax purposes is to be
determine with reference to non-Section 467 to be applicable a lease must be respected as a
lease for federal income tax purposes and not be treated as a service contract, a management
agreement, a joint venture, a financing or some other type of non-lease arrangement. Whether
or not a particular arrangement is a true lease depends on an analysis of all surrounding facts
and circumstances.10 The IRS has issued revenue procedures setting forth guidelines that must
satisfied to obtain and advance ruling that a "leveraged lease" will be respected for federal
income tax purposes (the "Guidelines"): Rev. Proc. 2001-28 (superseding Rev. Procs. 75-21, 76-
30 and 79-48) and Rev. Proc. 2001-29. The Guidelines are not substantive law. Revenue
Procedures are published to provide guidance to taxpayers concerning the internal practices and
procedures of the IRS relating to a specific issue. See Rev. Proc. 89-14, 1989-1 C.B. 814 which
states the objectives of and standards for the publication of revenue rulings and revenue
procedures in the Internal Revenue Bulletin. The Guidelines provide a list of criteria which if
satisfied ordinarily will entitle a taxpayer to a favorable ruling that a leveraged lease is a true
lease for federal income tax purposes. Those criteria include, among other things, that the lessor
have (i) a minimum specified at-risk equity investment in the property, (ii) a profit and positive
cash flow with respect to the property, and (iii) a significant residual interest in the property at
the end of the lease term. Guideline criteria address also ownership of non-severable
improvements to the leased property. While fixed price purchase options (FPOs) in favor of the
lessee are not consistent with the Guidelines, considerable case law supports grant of an FPO if
the option price is not unreasonably low.

10
In addition, section 7701(e) of the Tax Code provides that a contract that purports to be a
service contract or a partnership agreement will be treated as a lease if the contract is properly treated
as such, taking into account all relevant factors.

Law Offices of Timothy M. Toy 9

7. Section 467 Provisions

The Master Lease does contain certain sections that refer to the intent of the parties that
there shall "be considered to exist a loan … for purposes of Section 467 of the Code". It is my
opinion that such deemed "loan" is the creation solely of the current tax law accounting
provisions governing leases and does not represent a "loan" in any commercial law sense. A
commercial law loan requires the advance of funds with a fixed obligation for the repayment of
those funds. A commercial law loan requires the presence of an unconditional obligation for
amounts advance to be repaid; here there is no obligation to ever "repay" in any way any
amounts designated as Rent. A front-ended rent payment, under terms where such rent is
irrevocably paid, as is the case with this Master Lease, does not in and of itself create a repayment
obligation, so that a commercial law loan cannot exist. Instead, the provisions of Section 11(f) of
the Master Lease and the "Section 467 Loan" referred to therein are simply an agreement of the
parties as to the intended tax characterization, in accordance with the tax rules existing in 2005,
of the underlying commercial transaction. In fact, Section 11(f) of the Master Lease expressly
states "[i]n no event shall any principal or interest on any Section 467 Loan be separately payable
as such …, it being agreed and understood that these items represent characterizations for Tax
purposes only."

It is therefore my conclusion that the deemed "Section 467 Loan" does not represent an
advance of money in any commercial law sense and does not otherwise create an obligation of
the lessor to repay any amount on account of the previous payment of rents by the lessee. It
cannot be regarded in any way as a commercial law debt obligation.

8. Intent of the Parties

In conclusion, based upon my examination of the language of the Master Lease, the
economic schedules, and the anticipated economic and tax consequences associated with the
payment of rentals and any termination of the Master Lease, it is my unequivocal view that the
parties did not intend for the creation of any obligation of the lessor to the lessee in respect of
the Section 467 Loan balance.

9. Impact of Rent Allocation Provisions

One question that must considered in connection with any analysis of whether the lessor
owes any "obligation" to the lessee is the issue of the impact of the fact that Rent substantially
exceeds Allocated Rent and is therefore notionally in payment of future rent allocations under
the lease.

In this regard, there is no express obligation of the lessor to refund any previously paid
rents. To the contrary, Section 37 of the Master Lease ("Net Lease") and Section 11(a) of the
Master Lease make it clear that the payment of Rent is non-refundable and that the lessee has
no right of "abatement, reduction, set-off, counterclaim, rescission, refund, defense or deduction
with respect thereto." In other words, Rent was intended to be paid irrevocably.

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 Irrevocable payment of rents without regard to a rent allocation schedule is the typical
manner in which leverage leases are structured. Under the typical lease structure, the lessor is
entitled to specified cash payments of base or periodic rent, and then a specified termination
value in the event of an early termination of the lease. The rent allocation schedule, while
affecting the tax consequences to lessee and lessor, is economically meaningless in so far as cash
payments required under the typical lease are concerned. There is absolutely no evidence that
anything to the contrary was intended here.

One might ask, then, what is the intent of a Rent Allocation provision if it is in effect
rendered economically meaningless by reason of the other provisions of the Master Lease? The
answer is quite simple. The rent allocation provision is itself largely a construct of the tax law and
has been given increased prominence and importance with the enactment in 1984 of Section 467
of the Tax Code. Prior to the enactment of Section 467, prepaid rent was taxed immediately and
there was no particular need for a rent allocation provision. Thus, pre-1984 leases rarely
bothered to contain language allocating rents; such leases focused only on the payment of
rentals. As more fully discussed below, Section 467 allowed the repeal of the prior law rules
taxing prepaid rent, which repeal was possible only if the tax law adopted and respected a system
of rent allocation. The Section 467 regulations did so and effectively enables a system where the
parties' statement of the intended allocation was respected, so long as the lessor and lessee were
in equivalent tax brackets and there was no potential for tax avoidance; this rule was adopted
with little regard for the true economic effect of the allocation.

In conclusion, it is my opinion that Master Lease allocation provisions were intended to

be given effect and have relevance only for tax purposes.

10. Discussion of Section 467

Ultimately, the question to be addressed must be whether the parties created or intended
to create, by the language of the lease regarding Section 467, a commercial loan obligation
between the lessor and the lessee. To gauge that intent, and to aid in the interpretation of the
language of the Master Lease, it is useful to provide some background regarding Section 467.

Fundamentally, Section 467 and the regulations promulgated thereunder provide for
time-value-of-money-based accounting rules (not characterization rules) which govern the
recognition of income and deductions in respect of most (but not all) leasing transactions. These
rules are operative only for tax purposes and do not purport to override the commercial law
agreement of the parties under the lease; they merely to seek to tax that agreement in
accordance with a certain set of tax principles. Applicable Treasury Regulations unambiguously
provide that the Section 467 Loan is, from a tax perspective, a loan that exists for "Federal tax
purposes," § 1.467-4(a)(1), requiring the lessee to report Section 467 interest income and the

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lessor to report Section 467 interest expense, § 1.467.1(f)(e)(3), in each case as "interest for all
purposes of" the Tax Code.11

Although the economics of leasing are fundamentally based on time value of money
principles, until 1984 no time value money principles were applied in the tax law to leasing
transactions. This is not particularly surprising since it was only in 1984 with the adoption of
broad-based economic accrual rules for accounting for interest did time value of money
principles even really establish themselves in the Tax Code. But since 1984, the Tax Code has
increasingly recognized that many common commercial transactions can be and are frequently
structured without any regard to time value of money principles. For example, (i) a sale
transaction might be structured to provide for deferred payments without interest or without
adequate interest, (ii) an actual loan might be structured to provide for the payment of no
interest, low interest or excessive interest or front-ended or back-ended interest or fixed interest
rates that vary from period to period, (iii) an interest rate or currency swap might be structured
to provide for front-ended or back-ended payments and (iv) a lease might be structured to
provide for prepayments or deferred payments. None of these elements has any impact on the
commercial nature of the underlying transactions, but the Tax Code has for the last 20 years
provided the authority to the Internal Revenue Service to promulgate rules which require such
commercial transactions to be accounted for on a basis which creates, solely for tax purposes,
imbedded or hypothetical loan transactions. The effect of these "imbedded loans" does not in
any way affect or change the commercial law obligations of the parties to the transaction; the
effect of such loans is solely for purposes of accounting for the income or deductions of each of
the parties to the transaction in a manner deemed to be consistent with the IRS's time value of
money principles. The "Section 467 Loan" referred to in the Master Lease documentation is
simply an example of such a creation of the tax law and has no commercial law effect.

The basic statutory scheme of Section 467-- adopted in 1984 -- is based on the following
concepts: (i) mandatory accrual basis accounting for both lessors and lessees, (ii) accounting for
rental income on the basis of the rental allocation selected by the parties, except in tax avoidance
situations and (iii) implementation of time value of money (deemed loan) principles to account
for rents that are paid in a different period than the period to which the rents are allocated. The
implementation of these concepts is described below.

11. Mandatory Accrual Basis Accounting

If a lease is subject to Section 467 of the Tax Code -- that is, the lease provides for
increases or decreases in rent or deferred rents and is thus a "Section 467 rental agreement" --
both the lessor and lessee, regardless of their usual method of accounting, must take into
account rent on an accrual basis for tax purposes.12 "Section 467 rental agreements" include

11
The complete Section 467 regulations can be accessed via the following link:
http://www.access.gpo.gov/nara/cfr/waisidx_03/26cfr1v6_03.html.
12
IRC §467(a)(1).

Law Offices of Timothy M. Toy 12

leases that either (i) call for at least one rental payment to be made after the close of the calendar
year which follows the calendar year of the use of property to which the rental relates or (ii) call
for increases in the amount to be paid as rent.13

Under Section 467, except in tax avoidance situations (i.e., where the parties are in
different tax brackets and have impermissibly skewed the allocation of rents to obtain a tax
advantage), the determination of rent that accrues under the lease for tax purposes is to be made
by allocating rentals in accordance with the terms of the lease.14 The regulations allow the parties
to a lease extreme flexibility in Rent Allocation, as nothing in the statute or regulations requires
the rental allocation to have any economic significance other than the mere statement of the
parties of the amount of rent "allocated" to a particular lease period "for the use of property
during that period."15 The statute thus creates a straight-forward rule that simply respects the
parties chosen rental allocation for purposes of income accrual.

As an aside, it is for this reason that Section 11(f) of the Master Lease goes to great pains
in Section 11(f) to state the basis of rent allocation under the Lease. The draftsman of the Master
Lease was clearly attempting to satisfy the requirement of the Regulations that a rental
agreement will be treated as specifically allocating fixed rent if "the rental agreement
unambiguously specifies, for period no longer than a year, a fixed amount for rent for which the
lessee becomes liable on account of the use of the property during that period, and the total
amount of fixed rent specified is equal to the total amount of fixed rent payable under the
lease."16 The universal conclusion of the advisors in the leveraged leasing industry is that such
an allocation will be treated as a rent allocation for Section 467 tax purposes, even though
periodic rent payable under the lease is paid irrevocably in advance of allocated rent.

12. Imbedded (Deemed or Constructive) Loans

As referenced above, Section 467 was structured by the IRS and Treasury to import the
time value of money concepts surfacing elsewhere in the Tax Code into the tax accounting for

13
IRC §467(d)(1). An example of a transaction falling in the first category would be a 3-year lease
which provided for rents of $100,000 per year, all of which were to be paid at the end of year 3. An
example of a transaction falling in the second category is a 3-year lease calling for rents of $10,000 per
year for the first two years and $280,000 per year for the last year. Leases which do not involve payments
at least equal to $250,000 are not subject to the statutory rules of Section 467. IRC §467(d)(2).

14
Except in tax avoidance situations (addressed by a separate rule) this flexible rule made
complete sense: so long as lessor and lessee consistently accounted for the lease transaction, there was
no reason for the IRS to care about or challenge the rental allocation for tax purposes.

15
Treas. Reg. § 1.467-1(c)(2)(ii)(2).

16
See Treas. Reg. §l.467-1(c)(2)(ii)(2).

Law Offices of Timothy M. Toy 13

leasing transactions. As drafted, the statute provided a set of self-executing rules for leases have
deferred rentals (rents paid after the period to which they are allocated)17, and for the authority
of the IRS and Treasury to promulgate rules dealing with leases having prepaid rentals. In
particular, as to leases having prepayments, Section 467(f) mandated the Treasury Department
to provide for regulations governing prepaid or decreasing rentals.18 These regulations were
required by the relevant legislative history to be prospective in effect, but for unknown reasons
were never issued, even in proposed form, until 1996.19

On May 31, 1996, 12 years after the enactment of Section 467, the US Treasury issued
Proposed Regulations under Section 467 relating to the treatment of rent and interest under
certain agreements for the lease of tangible property. Final Regulations (the "Regulations"),
which substantially adopted the framework of the Proposed Regulations, were adopted in 1998.

17
Under Section 467(a)(l), under regulations to be promulgated, any amount allocable to a lease
period but paid in a later period is to be taken into account on a present value basis as specified by
regulations. Interest is also taken into account on such deferred rentals, either on an actual basis or an
imputed basis. The statutory language and the applicable legislative history suggest that it would be
applied by present valuing (discounting) the applicable rent payment from the date payable to the date
allocated under the agreement. Thus, in the case of deferred rents, the statute contemplates accounting
for rental income and deduction on the basis of the present value of each rent payment, which to the
extent unpaid is treated as, in effect, loaned back to the lessee. Under Section 467(a)(2), interest is then
imputed on rental amounts taken into account in a prior year but which remain unpaid. Under this
provision, interest is required to be taken into account by both lessor and lessee with respect to such
unpaid amounts at an interest rate equal to 110% of the applicable federal rate ("AFR") published for
purposes of Section 1274 for debt obligations having a term corresponding to the lease term. IRC
§467(e)(4).

18
Under regulations to be prescribed, "rules comparable to the rules of this section shall also
apply in the case of any agreement where the amount paid under the agreement for the use of property
described during the term of the agreement " IRC 467(f).

19
One might speculate that several quandaries led to the delay in developing a comprehensive
scheme for dealing with time value of money principles in the context of leases providing for prepaid
rentals. On the one hand, except for some potentially abusive cases where prepaid rentals could be used
to artificially accelerate income from the prepayment of rentals (such as utilization of expiring net
operating losses or "rent stripping" transactions in which a lease was stripped of its income and then
transferred), on the lessor side of the analysis, it was generally beneficial for the Treasury to retain the
pre-1984 rule requiring accrual basis lessors to account for lease rents when received if prior to the date
of accrual. One suspects that there was a fear that a rule consistently treating prepaid rentals as loans
could be abused, by allowing a lessor to receive cash without a concomitant income inclusion. While a
rule preserving the current law treatment of advance rentals except in abusive situations could have been
reasonably created, such a rule would have certainly lacked the elegance of the more consistent solutions
adopted for other financial instruments and may have been difficult to administer.

Law Offices of Timothy M. Toy 14

 In general, the Regulations set forth a levelization principle — under which income is to
be generally required to be recognized on a more or less level basis over the term of the lease
and adopt a unified theory regarding the treatment of imbedded loan transactions in leases. In
this regard, the Regulations mandate, for the first time, recognition of imbedded loans within a
lease and introduce the concept that the "accrual" of income or expense under the lease is totally
divorced from cash flow under the lease. As such, the Regulations set forth a set of rules that
were viewed by the leasing community as a significant departure from the rules that existed
previously and as turning the world of US tax-based leasing on its head.

13. Full Scale Implementation of the "Rent Levelizing" Rules

The first concept that is prevalent throughout the Regulations is the theory that any lease
which does not provide for level, ratable accrual of rentals (with some important exceptions),
must be recharacterized to provide for ratable accrual of rentals, if (i) there was a tax avoidance
motive for providing increasing or decreasing rent and (ii) the Commissioner determines it is
"appropriate" to do so. Under the Regulations, a tax avoidance motivation is determined under
all facts and circumstances, with a presumption of tax avoidance if one party is not a full taxpayer
and the other party is a full taxpayer. Perhaps the most significant feature of the regulations is,
however, the adoption of extensive (albeit narrow) safe harbors under which a lease will
conclusively be presumed to have not been structured with a tax avoidance motive.20

The Regulations nonetheless preserve the general principle of taxpayer freedom to

allocate rentals to periods within a lease; only in abusive (i.e., tax avoidance) cases will the
levelization principle be invoked.

14. Full Scale Implementation of the "Deemed Loan" Rules

The second concept on which the regulations are based is that any lease in which the
pattern of cash payments does not match the pattern in which rent is stated to accrue is treated
as having an imbedded loan. In this regard, the regulations provide that to the extent cumulative
payments to a lessor exceed cumulative accrued and allocated rent as of the close of the prior
calendar year, such payments are not rental income to the lessor, but are instead recharacterized
as loans by the lessee to the lessor. Conversely, to the extent rent allocated and accrued as of
the close of a calendar year exceed payments to the lessor as of the close of the succeeding
calendar year, the lessor is treated -- solely for tax purposes -- as having received the allocated
amount and having lent the cash back to the lessee.21

20
See Treas. Reg. § 1.467-3(c)(4) (uneven rent safe harbor for rents that do not vary by more than
10% from average rents).

21
Note that even under the Regulations, a Section 467 loan is not created merely because paid
rent differs from allocated rent. A cumulative difference over a period of more than one calendar year is
required before the concept of a Section 467 loan is even created.

Law Offices of Timothy M. Toy 15

 Under the Regulations, a lease can contain either an imbedded "deemed" or
"constructive" loan or a quasi-real loan (i.e., deferred or prepaid rent that bears an expressly
stated interest element).22 More specifically, under the Regulations a lessor and lessee will be
permitted within a lease to state that accrued but unpaid rent bears interest, as if the deferred
rent were a debt obligation.23 Nonetheless, both types of "loans" are essentially creations of the
tax law and are quite different substantively from a normal commercial loan. Indeed, it is the
absence of "adequate" stated interest on stated rentals that is used as the testing mechanism for
determining the application of the deemed loan rules in the first instance. If a lessor and lessee
state that unpaid rent in a lease bears interest, and the interest rate is at least equal to 110% of
the AFR, the lessor and lessee are required to account for the stated rent accrued under the lease,
plus (or minus, in the case of prepaid amounts) the stated interest accrual. If the lessor and lessee
do not provide for interest on unpaid rent at an adequate rate, then the Regulations would create
a deemed loan (referred to in the regulations as a "Section 467 loan") from the lessor to the
lessee, in the case of deferred amounts, and the lessee to the lessor, in the case of prepaid
amounts. This deemed loan will be deemed to bear interest at 110% of the AFR.24

15. Leases Having Inadequate Stated Interest—Proportional Rent Methodology

As described above, if the lessor and lessee do not expressly provide for the payment of
interest on unpaid (or prepaid) rent at an adequate rate, then the regulations create a deemed
loan -- from the lessor to the lessee, in the case of deferred amounts, and the lessee to the lessor,
in the case of prepaid amounts.

In order to accomplish the creation of a deemed loan in the context of a lease that does
not expressly provide for the payment of interest on unpaid or prepaid amounts, the draftsman
of the regulations were forced to provide for rules that recharacterize payments that were
otherwise denominated as rent under the lease as "interest," in the case of leases having
deferred rents, and to create "phantom" rents in the case of leases involving prepaid rents. In

22
To many in the leasing tax world, the concept of stated interest on deferred (or advance)
payments in a lease came as quite a surprise, as few if any practitioners had seen leases structured in this
manner.

23
While the concept of stated interest (or "adequate" stated interest) on deferred or prepaid
rentals appears quite a logical principle, particular in light of its prevalence throughout the debt-based
time value of money rules, it is one that had been actually implemented in relatively few leases as of the
time of the promulgation of the Regulations.

24
With the creation and implementation of a deemed loan concept that comprehensively and
adequately deals with the prepayment of rent, the regulations could repeal the advance rent rule which
previously required a lessor to take such amount into account as income on the basis of the earlier of
payment or accrual. The Regulations accomplish this repeal by amending the regulations under Treasury
Regulation § 1.61-8 and Treasury Regulation §1.451-1 to require application of the accrual rules of Section
467 in the case of agreements subject to Section 467.

Law Offices of Timothy M. Toy 16

addition, the regulations needed to provide for a mechanism to amortize the deemed loans. The
basis of the mechanism that was adopted revolves around the assumption that any deemed loan
must bear interest at 110% of the "applicable federal rates"25 (hereinafter, "AFR"). With this
assumption in hand, the Regulations compare the rent allocation schedule under the lease to the
actual cash rent payment schedule. By discounting each schedule at 110% of the applicable APR,
the Regulations determine the present value of the net amount of rent that must be
recharacterized as interest under the lease or the amount of "phantom" rent that must be
created in the case of leases involving prepaid rents. The Regulations then adopt a novel
"proportional" method of recharacterizing rent as interest or creating the necessary phantom
rent.26

Under the proportional method, the amount of rent that is to be taken into account as
rent under the lease (the "proportional rental amount") is the amount of fixed rent allocated to
the rental period under the rental agreement multiplied by a fraction the numerator of which is
the present values of the stream of payments of fixed rent and interest thereon and the
denominator of which is the present value of all fixed rents allocated as such under the lease.27
This calculation results in a single factor that is used to adjust each of the allocated rentals. In the
case of a lease with deferred rentals, the proportion will generally be less than 1, with the result
that the rentals to be taken into account will be a fraction of the stated allocated amount. In the
case of a lease with prepaid rentals, the reverse is true: the fraction will be greater than 1, with
the result that the amount taken into account as rent will actually exceed the amount allocated
as rent.

Once the proportional method is applicable to a transaction, the amount of any deemed
loan is determined by comparing the proportional rental amount (rather than the actual
allocated rental) to the cash payments under the lease, with the difference being accounted for
as a deemed loan. Under the imbedded loan rules, if a lease provides for deferred rent, the lessor
will be treated as having made a loan to the lessee, in which case the lessor is required to take
into account interest income on the loan and the lessee will be entitled to interest deductions
with respect to the deferred rentals. On the other hand, if the lease involves prepaid rentals, the
loan is deemed to flow in the other direction -- from the lessee to the lessor, in which case the
lessor has no income on the receipt of prepaid rentals which are deemed to be the receipt of
loan proceeds and is entitled to an interest deduction for interest imputed on such loan. The
lessee is, of course, required to report the corresponding interest income. In general, interest
accrues on such loans at 110% of the AFR, unless the parties explicitly state a different rate that
is not less than 110% of the AFR. The deemed loan will be amortized through a combination of

25
The AFR is a rate published on a monthly basis by the IRS under Section 1274 of the Tax Code.
The rate is intended to be representing an average yield on Treasury obligations of various maturities.

26
Treas. Reg. § 1.467-2(a); Treas. Reg. §1.467-2(c).

27
Treas. Reg. §1.467-2(c).

Law Offices of Timothy M. Toy 17

actual or deemed payments of "proportional rent" in the case of leases having advance payments
and through actual rents in the case of leases having deferred payments.

16. Nature of Section 467 Deemed Loan Rules

The above discussion, I believe, makes it clear that the "deemed loan" rules of Section
467 and the concept of a Section 467 Loan balance are just an extension of the tax law time value
money of principles that are employed by the taxing authorities to recharacterize commercial
transactions solely for tax purposes to reflect and take into account time value of money
principles. In no case is the commercial nature of those transactions and the legal obligations
created between the parties intended to be affected by these tax accounting rules.

17. Additional Topics for Shari'a Analysis

This standard U.S. net lease will raise a number of commercial matters that will need to
be addressed in order to render a particular lease shari'a compliant. Following is a list of certain
matters to be considered (this list is illustrative and not intended as exhaustive):

• The tower transaction involves a long head lease (32 years) and a shorter sub-
lease creating the possibility that the sub-lease rentals during renewal terms
could exceed the average rent (i.e., one thirty-second of the prepaid rent
amount). Does this possibility render the Tower Transaction non-compliant with
shari'a?

• In light of the non-refundable nature of prepaid rent, has the lessor shifted risk
of loss of the leased assets to the lessee in a manner prohibited by shari'a?

• How will insurance arrangements be handled? May conventional insurance be

used to insure against loss if Islamic insurance (takaful) is not available?

• In the context of a fully prepaid lease, is a lessor's right to terminate (with no

refund of prepaid rent allocable to the unexpired lease term) a forfeiture that is
not shari'a compliant?

• What is the nature and extent of the lessor's ongoing responsibility for structural
maintenance of the leased asset?28

28
Structural maintenance varies by asset class and covers those elements of structure,
maintenance and operating integrity of a leased asset that pertain directly to the benefits sought to be
obtained through a lessee's leasing particular assets (in other words, more than pure structural
maintenance).

Law Offices of Timothy M. Toy 18

 ANNEX A: 2005 COMMUNICATION TOWERS LEASE TRANSACTION

COMMUNICATION TOWERS LEASE TRANSACTION

BETWEEN SPRINT NEXTEL (LESSOR) AND
GLOBAL SIGNAL (LESSEE): CASE STUDY

A. Introductory Note: The following transaction description is derived from (i) filings made
under the Securities Exchange Act of 1934 by Sprint and GSI, (ii) certain rating agency
write-ups of the GSI commercial mortgage pass-through transaction described below at
C.6 and (iii) number crunching exercises.

B. Brief Description (Sprint 1934 Act Reports)

B.1 In May 2005, Sprint closed a transaction with GSI under which GSI acquired exclusive
rights to lease or operate 6,553 communications towers owned by Sprint for a negotiated
lease term, which is the greater of the remaining term of the underlying ground leases
(approximately 17 years in 2005), or up to 32 years (assuming successful renegotiation of
the underlying ground leases at the end of their current lease terms). Sprint has
subleased space on approximately 6,342 (96.7% of the 6,553 leased towers) of the towers
from GSI for a minimum of ten years (from 2005). Monthly rental is $1400 per tower per
month or an aggregate monthly rental approximating $9 million ($108 million annually).
The monthly rental increases at a rate of 3% per year (resulting in an average annual rental
over the minimum ten-year term of approximately $124 million). The net present value
of the Sprint sub-lease payments range over the minimum 10-year sublease term from
$804 million (using an 8% semi-annual discount rate) to $932 million (a 5% discount rate).

B.2 Sprint maintains ownership of the towers and continues to reflect the towers on its
consolidated balance sheet. Sprint did not treat the transaction as a sale and leaseback
for accounting (GAAP) purposes. Nor did Sprint treat the transaction as a sale for Federal
income tax purposes; the transaction documents clearly envision a true lease for tax
purposes1

B.3 At closing, Sprint received proceeds of approximately $1.2 billion, which were recorded
as rental income – communications towers (a non-current liability) on Sprint's
consolidated balance sheet. The deferred income is being recognized as a reduction of
lease expense relating to tower operating costs on a straight-line basis over
approximately 17 years from 2005 (the remaining terms of the underlying ground leases).
Sprint accounted for the $1.2 billion as cash flow from operating (and not financing)
activities. It is notable that the aggregate sub-lease rentals payable by Sprint ($1.24

1
Among other things, the 32-year lease term indicates that the appraiser determined the towers
to have an economic useful life of at least 40 years: a conclusion that seems warranted for bare towers
(i.e., towers without regard to the communication and other equipment attached to them).

Law Offices of Timothy M. Toy A-1

 billion) effectively repays (without regard to the time value of money) the $1.2 billion
prepaid rent over the ten-year minimum term of the sublease.2

B.4 Presumably, transaction efficiency would have been significantly eroded were the $1.2
billion rent prepayment to have been taxable as ordinary income to Sprint in the year of
receipt. A review of the transaction documentation reveals that the transaction was
structured to make maximum usage of section 467 of the Internal Revenue Code
(Section 467). In general terms, where a lease provides for substantial prepaid rent
(among other rent structures such as uneven or deferred rent) the transaction is
restructured for tax purposes so that the bulk of the prepayment is treated as an interest-
bearing loan from the lessee (GSI in this case) to the lessor (Sprint).3 The result of Section
467 is that the lessor's taxable income is spread out over the term of the lease. The lessor
has a combination of cash (the pre-paid rent from year one), an annual taxable income
item equal to allocated rent and an annual deduction item equal to interest on the
deemed loan. The lessee has a combination of an annual deduction equal to the allocated
rent and a partially off-setting taxable income item equal to the interest it is deemed to
have received in the Section 467 loan to its lessors.

B.5 Page A-5 is a tabular presentation of the $1.2 billion rent prepayment under the
section 467 regulations. Descriptions of the eight columns for the years within the 32-
year lease term are as follows:

Column Description
1 The $1.2 billion rent prepayment

2 This is a mechanical process: rent can vary between 90% and 110% of
average rent and the allocations will be respected in applying the section
467 regulations. Average rent is $37.5 million, 90% of which is $33.75
million and 110% of which is $41.25 million. The model uniformly pushes

2
Upon certain significant and continuing Sprint defaults, GSI can acquire title to the leased towers
for a nominal additional consideration. This remedy gives support for the inference that the parties
believed the present value of the towers to approximate the $1.2 billion amount of the pre-paid rent.

3
Loan proceeds do not constitute taxable income. While partial section 467 loan structures are
common in sale and leaseback financing transactions, it is unusual to see a transaction involving a 100 per
cent rent prepayment. It is interesting to note that neither Sprint nor GSI was the beneficiary of an
indemnification provision that would protect their respective economic positions in the event there was
a structural flaw with the 100% section 467 loan structure or if the structure did not otherwise hold up as
expected if audited by the IRS.

Law Offices of Timothy M. Toy A-2

 the higher rent payments to the later years consistently with maximizing
the deferral of rent income recognition by the lessor.4

3 Proportional rent for each period is the allocated rent for such period
multiplied by a fraction. The fraction is the present value of the cash rents
($1.2 billion paid on day one) divided by the present value of the allocated
rents (using a discount rate, as specified in the section 467 regulations
equal to 110% of the applicable federal rate: 5.32% in the example given).

4-7 The columns show the manner in which the measure of the rent
prepayment is calculated for purposes of inclusion as an interest deduction
item for the lessor as an interest income item for the lessee (the bulk of
the rent prepayment being treated as a loan by the lessee to the lessor).

8 This is the net amount of rental income to the lessor each period; the
lessee has a corresponding stream of net deductions over the lease term.

C. Brief Description (GSI 1934 Act Reports):

C.1 Sprint lessor entities are constituted as a series of bankruptcy–remote, special purpose
Delaware limited liability companies. The GSI lessee entity is similarly constituted.

C.2 The master lease and sublease arrangement terminate in 2037. here are no contractual
renewal options. The upfront payment of $1.2 billion is only payment for right to
lease/operate towers. The lessee entity has assumed all ground leases underlying the
towers. The lessee is obligated to pay all tower operating costs as well as an agreed
annual payment of $13.3 million (escalating by 3% a year throughout the 32-year lease
term) for personal and real property taxes attributable to the subject towers. An
important financial measure for a lessee is the net present value (NPV) of its minimum
lease payments. The $1.2 billion rent prepayment can be analyzed as a prepayment by
the lessee of the net present value of the aggregate of minimum lease payments.5 Under
this analysis, equivalent annual cash rents for 32 years range as follows:

4
The section 467 regulations allow a variance between 85% and 115% of average rents if the lease
involves property that is more than 90% "real estate" (as defined for purposes of the REIT regulations).
Maximum use of a 85/115 structure would significantly increase the opportunity to defer further rental
income recognition by the lessor.

5
This analysis disregards two important items: first, the flip-side of Section 467 (see B.4 above) is
that the lessee cannot deduct the entirety of the rent prepayment in the year made; and, second, its
annual rent deduction for tax purposes from income is offset by the amount of interest it is deemed to
have received under the section 467 loan.

Law Offices of Timothy M. Toy A-3

 Semi-Annual
Discount Rate Annual Rent

5% $75.6 million
6 84.8
7 94.4
8 104.4
9 114.9
10 125.2
It is notable that through a 10% discount rate, the average sub-lease rentals from Sprint
"cover" the rental implicit in a $1.2 billion NPV of rent; at lower discount rates, the
sublease rentals exceed the implicit rentals due to Sprint (for example, using a discount
rate of 6%, "excess" sublease rentals aggregate approximately $390 million over the ten-
year minimum sublease term)

C.3 During the one-year period prior to the 2037 expiration, GSI may purchase all (but not
less than all) of the then remaining leased towers for $2.3 billion. 6 As of transaction
closing, the NPV of the $2.3 billion ranged from $254.4 million (discounting semi-annually
at 7.00%) to $87 million (discounting semi-annually at 10.50%).7

C.4 GSI accounted for the transaction with Sprint as a capital lease "in reflection of the
substantive similarity to an acquisition". The primary driver for capital lease treatment
was the very substantial upfront rent prepayment.

C.5 After the ten-year minimum term, Sprint may terminate the sublease at any or all leased
towers, provided that if a minimum of one-year notice is not given as to a tower, there is
an automatic five-year renewal for such tower. In addition, Sprint may terminate the
sublease as to any or all towers on the 15th, 20th, 25th or 30th anniversary of the May
27, 2005 closing date.

C.6 GSI initially funded the $1.2 billion prepayment from the proceeds of an $850 million
secured bridge loan and equity offerings of $433.4 million. In February 2006, GSI
refinanced the bridge loan from the proceeds of a $1.55 billion commercial mortgage
pass-through obligation ("CMO") transaction that also refinanced secured loans relating
to other GSI mortgage loans. The CMOs are interest-only for five years and mature in
February 2011 and have a weighted average fixed rate per year of approximately 5.7%.
The issuer of the CMOs, Global Signal Trust III, issued that involved no fewer than seven

6
$2.3 billion was determined, by appraisal, to be expected aggregate fair market value of the
leased towers on May 27, 2037, the purchase option exercise date.

7
Other data points (NPV/discount rate): $137.5 million (9.00%); $187.0 million (8.00%); $347
million (6.00%); and $473.6 million (5.00%).

Law Offices of Timothy M. Toy A-4

 (7) layers of subordination thereby garnering AAA ratings (Standard & Poor's and Fitch)
on $702.4 million (45.3%) of the $1.55 billion total. Fitch (but not S&P) awarded AAA to
the $132.2 million of second tier certificates and BBB or above ratings to a total of 87.8%
of the $1.55 billion (first through fifth levels of repayment priority).

C.7 A technical discussion of the Section 467 loan follows at Part D below, pages A-6 to A-8.

Law Offices of Timothy M. Toy A-5

6NEWYORK\25391.3 A-5
D. Technical Discussion Of The Section 467 Loan

D.1 Under the final Section 467 regulations, Section 467 applies to any rental agreement with
increasing or decreasing rent that exceeds certain limits, as well as any rental agreement
with deferred or prepaid rents. It is important to establish that the rent structure being
considered for a proposed transaction is not subject to constant rental accrual under
Section 467.

• Specifically, if the allocated rent is within the rules of the 90-110 safe harbor
described in the final regulations, constant rental accrual should not apply and the
allocations should be respected.

• The lessor’s income from each allocated rent is fractioned by proportional rent,
an overall measure of deferral or prepayment of the rent.

• Furthermore, the lessor’s income from scheduled rental allocations is decreased

or increased by interest expense and income, respectively, from the 467 loan that
is deemed to result from the prepayment and deferral of rent.

D.2 This discussion provides the background of how the final regulations are applied in
reaching the conclusions stated above and in analyzing the "467 loan" alternative rent
structures. As the steps are traced to the safe harbor, proportional rent calculation, and
467 loan application, the relevant references to the Section 467 final regulations are
listed.

D.3 90-110 Safe Harbor: It must first be established that the allocated rents do not cause the
agreement to be subject to constant rental accrual.

• A rental agreement with increasing rents or deferred or prepaid rents is treated

as a Section 467 rental agreement (1.467-1(c)(1)).

• The three-month rent holiday that is allowed by the final regulations is

disregarded in the determination of increasing or decreasing rent (1.467-
1(c)(2)(B)).

• A Section 467 agreement may specifically allocate fixed rent to the rental periods
of the lease term (1.467-1(c)(2)(A)).

• Section 467 rent includes the fixed rent for any rental period (1.467-1(d)(1)).

• The fixed rent for a rental period includes the proportional rental accrual (1.467-
1(d)(2)(ii)).

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 • A Section 467 rental agreement is subject to constant rental accrual if it is a
disqualified leaseback or long-term agreement (1-467-3(a)). A rental agreement
that has increasing or decreasing rent is not a disqualified leaseback if tax
avoidance is not a principal purpose for providing the increasing or decreasing rent
(1-467-3(b)(1)(i)). A safe harbor for these purposes is meeting the uneven rent test
described in 1.467-3(c)(4)(i), under which the 90-110 test is applied to allocated
rent.

D.4 Compliance of the allocated rents with the 90-110 safe harbor clears the first hurdle in
establishing an acceptable structure.

D.5 Proportional Rent: The calculation of proportional rent results in a fraction that is an
overall measure of prepayment or deferral. The fraction is applied to each allocated rent.

• Proportional rent is used for the fixed rent for each rental period if the Section 467
rental agreement is not a disqualified leaseback and adequate interest on fixed
rent is not provided (1.467-2(a)).

• Proportional rent for each period is the allocated rent for such period, multiplied
by a fraction. The fraction is the present value of the rents payable under the
agreement divided by the present value of the rents allocated under the
agreement (1.467-2(c)(1)).

• The present values are computed as of the first day of the first rental period in the
lease term, using a discount rate of 110% of the applicable Federal rate (1.467-
2(d)).

If a rental agreement has prepaid rent, the proportional rent calculation will result in a
number that is greater than 1. Each allocated rent will be increased by this factor.
Conversely, an agreement with deferral will produce a proportioning factor that is less
than one, reducing each allocated rent.

Note that the proportional rent calculation will not affect compliance with 90-110, since
each allocated rent is multiplied by the constant proportioning factor.

D.6 467 Loan: The final step in the structuring process is the inclusion of an ongoing measure
of prepayment or deferral. This measure takes the form of the 467 loan, which can have
either a positive or negative balance at various points in time (1.467-4(a)). When the
balance is positive (representing a deferral of rent), the lessor has interest income from a
deemed loan to the lessee. When the balance is negative (representing a prepayment of
rent), the lessor has interest expense from the deemed loan from the lessee.

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D.7 More specifically:

• If a Section 467 rental agreement does not provide adequate interest (through
either having no deferred or prepaid rent or by stating an interest rate), then a
467 loan arises under 1.467-4(b); if rent is prepaid, the lessor has interest expense
on the 467 loan, and if rent is deferred, the lessor has interest income.

• The 467 loan balance is the sum of prior rent accruals, plus prior interest income
of the lessor, less prior interest expense and rent paid (1.467-4(b)). A positive
balance will result when accruals exceed payments (rent deferrals from the
lessor’s view); a negative balance will occur when payments exceed accruals (rent
prepayment from the lessor’s view).

The interest rate on the 467 loan, for agreements that have proportional rent, is prescribed as
110% of the applicable Federal rate (1.467-4(c)(2))

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