Tuesday, September 6, 2011

Sale-leaseback


A real estate financing technique whereby a property owner sells the property to an investor or lender and, at the same time, leases it back. The lease used is usually a full net lease that extends over a period of time long enough for the investor-lender to recover his or her funds and to make a fair profit on the investment. The arrangement allows the original property owner to “pull out” his or her equity from the property and the rents paid to the investor are fully deductible expenses in the year in which they incur.

Thus, a seller/lessee enjoys many benefits: retaining possession of the property while obtaining the full sales price and, in some cases, keeping the right to repurchase the property at the end of the lease; freeing the capital that was frozen in equity; maintaining an appreciable interest in realty, which can be capitalized upon by subleasing or mortgaging the leasehold; and getting a tax deduction for the full amount of the rent, equivalent to taking depreciation deductions for both the building and the land. In addition, a lease appears as an indirect liability on a firm’s balance sheet, whereas a mortgage shows up as a direct liability and adversely affects the firm’s debt ratio in terms of obtaining future financing.

The advantages to the investor/landlord in this type of arrangement include a fair return on and of investment in the form of rent during the lease term, and ownership of a depreciable asset already occupied by a reliable tenant. The investor is buying a guaranteed income stream that can probably be sheltered through the proper use of depreciation allowances and the investor can actually manage his or her risk by the amount of rent he or she requires.

When the lease includes an option for the tenant to repurchase the property at the end of the lease term, it is called a sale-leaseback-buyback. However, care must be taken to establish the buyback price for the fair market value at the time of sale; otherwise the arrangement is considered a long-term installment mortgage, and any income tax benefits that might have been enjoyed during the term of the lease will be disallowed by the Internal Revenue Service.

1 comment:

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