Leaseback

Short For Sale and Leaseback

Leaseback, short for sale-and-leaseback, is a financial transaction, where one sells an asset and leases it back for a long-term: thus one continues to be able to use the asset, but no longer owns it.

This is generally done for fixed assets, notably real estate and planes, and the purposes are varied, but include financing, accounting, and tax reasons.

Leaseback arrangements

After purchasing an asset, the owner enters a long-term agreement by which the property is leased back to the seller, at an agreed-to rate. One reason for a leaseback is to transfer ownership to a holding company while keeping proper track of the ongoing worth and profitability of the asset. Another is for the seller to raise money by offloading a valuable asset to a buyer that is presumably interested in making a long-term secured investment. Sale Leaseback arrangements are common in the REIT industry.

Possible solution to toxic banking assets

According to Robert Peston, Business Editor for the BBC, one option being considered for dealing with the Subprime mortgage crisis is a sale-and-leaseback of toxic assets. Peston says "a sale-and-leaseback between the banks and the state has two supreme advantages: there's no need to value the poisonous assets; and losses on those stinky assets would be absorbed by the banks in manageable chunks over about 10 years." 

Real estate

Leaseback arrangements are popular in France, the United States and the United Kingdom.

France

The seller is a promoter working with a property management company, Typically the initial lease is for 9 to 11 years (In France). The net rental yields are usually in the range 3 to 5% per annum (based on the purchase price). Anything above 5% is hardly achievable, rates above 5% are not offered by sound companies with proven track records. The properties in these arrangements may be residential units, business residence, student residences, holiday ski, beach and golf resorts, or almost any other type of commercial real estate in France.

Leaseback of residential property has been popular in France for many years and there are significant tax advantages. Under the scheme the purchaser may use the property usually between 1 to 8 weeks per year (with a maximum of 6 months per year). The French government encourages the development of leaseback schemes in touristic areas to alleviate shortages in rental accommodation. The French government rebates the local tax, called VAT, when the property is purchased. Currently the VAT rate is 19.6%. In France, a leaseback property typically has to remain in the leaseback scheme for a period of 911 years, depending on the specific property and program. The property should be kept at least 15 years for the sale to be capital gain tax free. For a full VAT rebate you should keep it for 20 years. As of January 2008 if you sell it after its initial lease period of 11 years then you no longer have to pay back the 9/20 of VAT as long as you sell it with a renewed lease contract (normally for another 9 or 11 years). If however you choose not to renew after the initial lease period expires of 11 years then you will be obliged to pay back 9/20 of the VAT. You can also sell your leaseback at any time during the lease period- the buyer will simply have to take over the remainder of the lease contract.

Other countries

The leaseback concept has spread to other European countries including Spain and Switzerland. Typical property available are studios, apartments and villas. They are situated in ski areas, beach resorts or golf courses.

Commercial Real Estate

A sale-and-leaseback is typically a commercial real estate transaction in which one party, often a corporation, sells its corporate real estate assets to another party, such as an institutional investor, or a real estate investment trust (reit), and then leases the property back at a rental rate and lease term that is acceptable to the new investor/landlord.

In a sale-and-leaseback, the lease term and rental rate is based on the new investor/landlord's financing costs, the seller/lessee credit rating, and a market rate of return based on the initial cash investment by the new investor/landlord. The reasons and advantages for doing a sale-and-leaseback by a seller/lessee are varied, but the most common are:

  • Help finance expansion of the existing business, purchase new plant equipment, or invest in new business opportunities.
  • Help pay down debt and improve the company's balance sheet.
  • Help reduce the seller/lessee's business income tax liability caused by the appreciation in value (land only) of its corporate real estate assets. In addition, the seller/lessee as a tenant can deduct all rent payments as a legitimate business expense on its annual tax returns.
The advantages of doing a sale-and-leaseback by an investor/landlord are:
  • Fair return on the investment in the form of rent during the lease term, and ownership of a depreciable asset already occupied by a reliable tenant.
  • Long term fully leased asset with a guaranteed income stream.
  • For income tax purposes the investor/landlord can take an expense deduction for an investment in a depreciable property to allow for the recovery of the cost of the investment.
When considering to do a sale-and-leaseback transaction always consult with a qualified commercial real estate broker, attorney, and accountant.

Aviation

Leaseback is also commonly used in general aviation, with buyers using the scheme to let flight schools and other FBOs use their aircraft.

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