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What is a Leaseback?
A leaseback, sometimes known as a sale/leaseback or sale and leaseback, it is a transaction wherein the owner of a property sells that property and then leases it back from the buyer. The purpose is to free up the original owner's capital while allowing the owner to retain possession and use of the property. The type of property involved can be anything from residential or commercial real estate to equipment or vehicles.
Both the buyer and the seller can benefit from a leaseback. The seller gets a lump sum of cash quickly, and the buyer gets a lower than market value purchase price, along with a long-term lease at a premium rate. The lease amount provides periodic income and may even be enough to pay the buyer's mortgage, if he or she borrowed money to obtain the property. This type of transaction can be a great investment tool that yields a high return, although as with any investment, there are associated risks.
Some leaseback arrangements allow the seller, or current lessee, the option to buy back the property at a future date. During the life of the lease, however, the buyer derives tax benefits from the arrangement, such as being credited for depreciation of the property. If the seller exercises the option of buying the property back, all rights will revert to him or her upon closing the transaction, so setting the sale for the end of the tax year is a convenient way to keep things straight for tax purposes. This is important, because if either party is audited, both can experience problems that range from minor inconveniences to very costly dilemmas.
If the seller files bankruptcy or is audited, and tax officials or a bankruptcy court believes that the seller arranged the leaseback to hide assets, the transaction can be reclassified. Ownership of the property will be credited to the original owner, and the property may be confiscated in order to resolve tax liens or arrears to other creditors. In this case, the buyer could lose a great deal of money.
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![When an owner sells a property and then subsequently leases it back from the buyer, it's called a leaseback.]()
By: phasinphotoWhen an owner sells a property and then subsequently leases it back from the buyer, it's called a leaseback.
Discussion Comments
I need a draft of sale and Lease Back Agreement for a motor vehicle used in financial institutions.
I want to know how can i convince customers to sell their equipment to me, then i leaseback to them.Their life is three years and i will be maintaining them. they will be just using them.
The transaction is generally done for fixed assets, notably real estate and planes, and the purposes are varied, including financing, accounting and taxing.
What is the implication of a sale and leaseback transaction that results in a finance lease? can you provide examples and the journal entries?
How do I know the owner will file bankruptcy? I have a leaseback transaction now, and just opened the escrow three days ago, and now I am so scared.
I really like the property, but now I don't want to take a risk, and better cancel escrow.I am so lucky to see this Web page. Many, many thanks.
The benefit to the lessee is just as the article says--to free up capital, and take depreciation and capital costs off the balance sheet.
The benefit to the lessor is the return derived from owning the property and leasing to a guaranteed tenant who is already interested in the building, and may be willing to sign a long-term NNN lease.
A corporation will either own the building, and then sell to an investor or real estate developer, and then "lease it back" to receive balance sheet savings and reduce maintenance costs--or--a real estate developer will construct the building as a "build-to-suit", and then lease to a guaranteed tenant.
rick9 re: CPA 17: Take a look at the prospectus filed with the SEC (on EDGAR).
I believe it indicates that 13 percent of your purchase goes to fund expenses and fees (that means you pay a dollar to get 87 cents of value).
Why not just buy publicly traded commercial REIT's and get 100 cents of value for your purchase price (at least you're not starting in a hole, 13 percent down - by the way, that assumes they market the entire issue, any amount issued less than the maximum could drive the percentage even higher than 13 percent). This is my interpretation of the prospectus, read it yourself and draw your own conclusions.
CPA:17
Can anyone help me with this commercial REIT? They are basically a sale-leaseback REIT that is being marketed to me. I know they are a private non-publicly traded REIT. I am concerned about the commercial real estate market.
Why would a company do this instead of just leasing from the beginning? Why own first and sell?
How do you account for a sale and lease back? i mean what effect does it have on the pnl and where?
before operating profit or after?
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