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LEGAL DICTIONARY

Leaseback

What Is a Leaseback?

A leaseback (also called a sale-leaseback or a sale-leaseback transaction) is a legal arrangement in which the previous owner of an asset leases it back from the current owner. Under this transaction, the previous owner can continue to use the asset without having ownership.

A leaseback example is a builder who needs to raise capital to purchase expensive equipment but needs to retain the asset in order to operate its business.

The most common users of sale-leasebacks are builders or other companies with expensive fixed assets such as land or large equipment. As a result, leasebacks are often used in the transportation, real estate, and aerospace industries.

What Are the Benefits of a Leaseback?

A leaseback has advantages over a loan in that it does not show up as a debt on a company’s records. Instead, the balance sheet will show an increase in cash. The company can use this liquid capital to pay off debt, purchase new equipment, or invest in new projects. Without incurring debt, the company retains its ability to secure debt financing in the future if it needs to do so.

Get Your Loan Agreement Here

Another advantage of a real estate sale-leaseback is that it enables a homeowner to gain 100 percent of the fair market value for their property. A mortgage loan typically offers 80 percent or less in valuation.

Also, with traditional debt (such as a mortgage), a company faces exposure to economic downturns in the future. Leasebacks often are “locked in” for 20 to 30 years at an attractive rental rate. This fixed rate offers stability for the lessor.

A leaseback can be structured so that it benefits both parties. For example, both the lessor and lessee may choose to be partners on future expansions or improvements to the asset during the lease and beyond.

A triple net lease allows the previous owner (the lessee) to maintain control of the asset without having any cash tied up in equity. At the end of the lease, the lessee can buy back the asset for a negotiated amount, return and relinquish the asset, or negotiate other renewal options.

Another significant benefit of a leaseback is that a company may be able to deduct their entire lease payment as a business expense on their taxes.

Are There Disadvantages of a Sale-Leaseback Transaction?

There can be some disadvantages to a sale-leaseback agreement.

  1. Potential loss of the asset. At the end of a sale-leaseback agreement, the new owner (the lessor) may not allow the previous owner (the lessee) to repurchase the asset or property. Some sale-leaseback agreements have a clause that requires a repurchase option.

  2. Fixed payments. In a real estate leaseback, the lessee is locked into certain rental payments and interest rates. Depending on the economy, this factor can be an advantage or a disadvantage.

  3. Lack of flexibility. Although the lessee maintains control over the asset, they will need to revise the contract to sell or relocate it.

  4. Tax considerations. If the lessee previously owned the property for a long time and the property value depreciates, the lessee may have to pay higher taxes on the actual sale transaction. A leaseback also may affect capital gains and ordinary tax rates for both parties.

The following table summarizes the advantages and disadvantages that we have discussed:

Pros of Sale-Leaseback Transactions Cons of Sale-Leaseback Transactions
Does not show up as debt Potential loss of the asset
Enables a homeowner to gain 100 percent of the fair market value Fixed payments that may become unfavorable
The lessee can buy back the asset at the end of the lease Lack of flexibility in the contract
A company may be able to deduct their lease payment as a business expense Potentially higher taxes, depending on the circumstances

Helpful Resources:

Investopedia - Leaseback (or Sale-Leaseback)

The CCIM Institute - Commercial Connections

CT Department of Revenue Services - Sales and Use Taxes on Sale and Leaseback Arrangements

What Is a Leaseback?

A leaseback (also called a sale-leaseback or a sale-leaseback transaction) is a legal arrangement in which the previous owner of an asset leases it back from the current owner. Under this transaction, the previous owner can continue to use the asset without having ownership.

A leaseback example is a builder who needs to raise capital to purchase expensive equipment but needs to retain the asset in order to operate its business.

The most common users of sale-leasebacks are builders or other companies with expensive fixed assets such as land or large equipment. As a result, leasebacks are often used in the transportation, real estate, and aerospace industries.

What Are the Benefits of a Leaseback?

A leaseback has advantages over a loan in that it does not show up as a debt on a company’s records. Instead, the balance sheet will show an increase in cash. The company can use this liquid capital to pay off debt, purchase new equipment, or invest in new projects. Without incurring debt, the company retains its ability to secure debt financing in the future if it needs to do so.

Get Your Loan Agreement Here

Another advantage of a real estate sale-leaseback is that it enables a homeowner to gain 100 percent of the fair market value for their property. A mortgage loan typically offers 80 percent or less in valuation.

Also, with traditional debt (such as a mortgage), a company faces exposure to economic downturns in the future. Leasebacks often are “locked in” for 20 to 30 years at an attractive rental rate. This fixed rate offers stability for the lessor.

A leaseback can be structured so that it benefits both parties. For example, both the lessor and lessee may choose to be partners on future expansions or improvements to the asset during the lease and beyond.

A triple net lease allows the previous owner (the lessee) to maintain control of the asset without having any cash tied up in equity. At the end of the lease, the lessee can buy back the asset for a negotiated amount, return and relinquish the asset, or negotiate other renewal options.

Another significant benefit of a leaseback is that a company may be able to deduct their entire lease payment as a business expense on their taxes.

Are There Disadvantages of a Sale-Leaseback Transaction?

There can be some disadvantages to a sale-leaseback agreement.

  1. Potential loss of the asset. At the end of a sale-leaseback agreement, the new owner (the lessor) may not allow the previous owner (the lessee) to repurchase the asset or property. Some sale-leaseback agreements have a clause that requires a repurchase option.

  2. Fixed payments. In a real estate leaseback, the lessee is locked into certain rental payments and interest rates. Depending on the economy, this factor can be an advantage or a disadvantage.

  3. Lack of flexibility. Although the lessee maintains control over the asset, they will need to revise the contract to sell or relocate it.

  4. Tax considerations. If the lessee previously owned the property for a long time and the property value depreciates, the lessee may have to pay higher taxes on the actual sale transaction. A leaseback also may affect capital gains and ordinary tax rates for both parties.

The following table summarizes the advantages and disadvantages that we have discussed:

Pros of Sale-Leaseback Transactions Cons of Sale-Leaseback Transactions
Does not show up as debt Potential loss of the asset
Enables a homeowner to gain 100 percent of the fair market value Fixed payments that may become unfavorable
The lessee can buy back the asset at the end of the lease Lack of flexibility in the contract
A company may be able to deduct their lease payment as a business expense Potentially higher taxes, depending on the circumstances

Helpful Resources:

Investopedia - Leaseback (or Sale-Leaseback)

The CCIM Institute - Commercial Connections

CT Department of Revenue Services - Sales and Use Taxes on Sale and Leaseback Arrangements