Posted on 08/07/2011 at 02:20 PM by Benjamin Bruner
The sale-leaseback concept is not a new one, but it is one that is being utilized more and more in todays economic climate as the financial and tax benefits can be numerous for both parties. In its simplest form, a sale-leaseback is a transaction in which the owner of property sells the property and simultaneously leases it back from the purchaser. The purposes of a sale-leaseback are typically related to financing, accounting and/or tax. The benefits of a sale-leaseback can be quite substantial for both the seller/lessee and the buyer/lessor. The primary benefits to (and thus motivation of) the seller/lessee in a normal sale-leaseback are typically as follows:
- An immediate influx of cash while retaining the use of the property.
- Cash payment equal to 100% of the propertys fair market value (as compared to 75%-80% of fair market value with conventional financing).
- Increase in current ratio on the companys balance sheet.
- Tax deductible rental payments (as compared to conventional financing where only interest is deductible).
- Deductible loss or offsetting gain on the sale of the property (depending on the gain or loss to be recognized on the sale and the need of the company).
- Higher rate of return (as compared to simply loaning money to the seller).
- A hedge against inflation, since any appreciation in value accrues to the owner (this benefit is negated where the agreement allows the seller/lessee the option to repurchase).
- Secured long-term investment requiring little or no ongoing management and providing a guaranteed return.
- Ability to take depreciation deductions where improved land is involved.