What is a Sale Leaseback
A Sale leaseback is typically a real estate transaction where the owner of the real estate who also operates a business out of the real estate, sells the real estate to “monetize” the real estate and then leases the real estate back from the new buyer. In essence the business was operating out of the real estate when the business owned the real estate and in a sale leaseback the business continues operations in real estate but is now the tenant. Sale Leasebacks are a great way for businesses to free up cash from real estate and reinvest back into operations of the business.
Wisegeek defines a sale leaseback as such (http://www.wisegeek.com/what-is-a-leaseback.htm):
A leaseback is very simple really. 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 of the leaseback 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.
A leaseback can be beneficial for the buyer and seller alike. The seller attains a lump sum of cash quickly and the buyer acquires 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. A leaseback can be a great investment tool, one that yields a high return. As with any investment, however, 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 leaseback, 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 the seller upon closing the transaction, so setting the sale for the end of the tax year is a convenient way to keep things straight for the Internal Revenue Service. This is important, because if either party is audited during the leaseback, both can experience problems that range from minor inconveniences to very costly dilemmas.
If the seller files bankruptcy or is audited, and the IRS or 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, so caution is advised when considering a leaseback agreement.
Wikipedia defines a sale leaseback like this: (http://en.wikipedia.org/wiki/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.
Businessfinance.com (http://www.businessfinance.com/real-estate-sale-leaseback.htm) defines a sale leaseback as:
Real estate sale leaseback makes your equity work for your business.
Real estate sale leaseback financing is when a business sells its commercial property for current market value and then instantly leases it back. They sell it to gain built up equity which frees up capital which can be used to invest back into the business. There are many other benefits to this transaction as well.
The balance sheet of your business is improved greatly and you retain control of the property. Since you will be leasing the property you can defer a good portion of the tax liability. With a lease you can write off the full payment each month whereas with a regular loan only the interest payment can be written off. When you complete this transaction you are always guaranteed the full market value of your property, so you don’t risk losing any money in equity.
The other benefit is that you can get a lease for commercial property for up to 25 years, which can lower your monthly payments considerably. This gives you more operating capital each month since your monthly payments will go back down some.
Real estate sale leaseback transactions are becoming more popular because they generate capital for immediate use within your business. It unlocks the value in your real estate. With real estate you can get more capital because of how fast it grows. Some businesses do sale and leaseback transactions for equipment as well.