Leaseback, short for "sale-and-leaseback", is a
financial transaction in which one sells an
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
and
lease
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
s it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done for
fixed asset
A fixed asset, also known as long-lived assets or property, plant and equipment (PP&E), is a term used in accounting for assets and property that may not easily be converted into cash. Fixed assets are different from current assets, such as cash ...
s, notably
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
, as well as for
durable
Durability is the ability of a physical product to remain functional, without requiring excessive maintenance or repair, when faced with the challenges of normal operation over its design lifetime. There are several measures of durability in use, ...
and
capital good
The economic concept of a capital good (also called complex product systems (CoPS),H. Rush, "Managing innovation in complex product systems (CoPS)," IEE Colloquium on EPSRC Technology Management Initiative (Engineering & Physical Sciences Researc ...
s such as airplanes and trains. The concept can also be applied by national governments to territorial assets; prior to the
Falklands War, the government of the United Kingdom proposed a leaseback arrangement whereby the
Falklands Islands
The Falkland Islands (; es, Islas Malvinas, link=no ) is an archipelago in the South Atlantic Ocean on the Patagonian Shelf. The principal islands are about east of South America's southern Patagonian coast and about from Cape Dubouze ...
would be transferred to
Argentina
Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country in the southern half of South America. Argentina covers an area of , making it the second-largest country in South America after Brazil, th ...
, with a 99-year leaseback period, and a similar arrangement, also for 99 years, had been in place prior to the
handover of Hong Kong
Sovereignty of Hong Kong was transferred from the United Kingdom to the People's Republic of China (PRC) at midnight on 1 July 1997. This event ended 156 years of British rule in the former colony. Hong Kong was established as a special admini ...
to mainland China. Leaseback arrangements are usually employed because they confer financing, accounting or taxation benefits.
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 rate. One reason for a leaseback is to transfer ownership to a
holding company
A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
while keeping proper track of the ongoing worth and profitability of the asset. Another reason is for the seller to raise money by offloading a valuable asset to a buyer who is presumably interested in making a long-term secured investment. Leaseback arrangements are common in the
REIT
A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping ce ...
industry.
Possible solution to toxic banking assets
According to Robert Peston, one-time Business Editor for the BBC, one option being considered for dealing with the
subprime mortgage crisis is a sale-and-leaseback of
toxic asset A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market. Such assets cannot be sold at a price satisfactory to the holder. Because assets are offset against liabilities and freq ...
s. 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, United Kingdom, and throughout Australia and Asia, including, more recently, in India.
France
Leaseback of residential property has been popular in
France
France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of overseas regions and territories in the Americas and the Atlantic, Pacific and Indian Oceans. Its metropolitan area ...
for more than 30 years, and there are significant tax advantages. Under the scheme, the purchaser may use the property usually between 1 and 8 weeks per year (with a maximum of 6 months per year). The
French government
The Government of France (French: ''Gouvernement français''), officially the Government of the French Republic (''Gouvernement de la République française'' ), exercises executive power in France. It is composed of the Prime Minister, who i ...
encourages the development of leaseback schemes in touristic areas to alleviate shortages in rental accommodation. The government rebates the local
VAT (which is 19.6%), when the property is purchased off plan.
The scheme works by purchasing a freehold property. You become the legal owner. The property is then leased back to the developer or a management company. Under the leaseback scheme the government also refunds to you the VAT normally charged on a new build properties (currently 19.6%).
The owner is then guaranteed a rental income throughout the period of the lease. The net return to the owner varies between developments but is typically between 4% to 6%. This compares very favourably with a typical 20 year fixed rate mortgage of around 3.75%, and variable rate mortgages which are lower. It can be seen how the rental income can be used in respect of the mortgage payments. Loans of between 75% and 85% are available depending upon circumstances. The rental yield is also index linked annually to construction costs, which means the rental income currently increases by approximately 2.5%.
As in the UK there are tax allowances in respect of mortgage payments which can be offset against income. The lease typically lasts for between 9 and 11 years, after which the management company has the option to either renew, or the property can be sold, or rented out and held privately by the owner.
The purchaser/owner can also enjoy periods of usage free of charge through the year, depending upon the terms of the lease. These terms normally allows for between 4 and 6 weeks free usage each year. The management company is responsible for the maintenance of the property including the maintenance of furnishings which are often included in the purchase price. The developer is also responsible for insuring the building and its contents. It also pays for some of the property taxes and all the utility costs.
United Kingdom
In the United Kingdom, a form of leaseback known as
sale and rent back
Sale and rent back is a form of property transaction involving the expeditious sale of an owner occupier's residence to a landlord or property company and renting it back from the new owner.
Sale and rent back in the UK
In the UK, the residence ...
was the subject of a 2014
Supreme Court case that found many such arrangements had been perpetrated fraudulently.
United States
A "sale/leaseback" or "sale and leaseback" is a transaction in which the owner of a property sells an
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
, typically
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
, and then
leases
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
it back from the
buyer
Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agency buys goods or serv ...
. In this way the transaction functions as a
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
, with payments taking the form of
rent
Rent may refer to:
Economics
*Renting, an agreement where a payment is made for the temporary use of a good, service or property
*Economic rent, any payment in excess of the cost of production
*Rent-seeking, attempting to increase one's share of e ...
. Due to the lack of financing available in today's market, many American businesses are increasingly turning to sale-and-leasebacks to provide quick
capital. For example, developers of master-planned communities will often sell the
model home
A show house, also called a model home or display home, is a term for a "display" version of manufactured homes, or houses in a subdivision. They are used on newly built developments to show the living space and features of homes available. Show ...
to a buyer before the community is sold out, leasing it back from the buyer for a period of up to two years. In some arrangements, the current
lessee
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industria ...
will give the option to buy the asset back at the end of the lease. Typically, if the original owner were to buy back the asset, it would take place at the end of the
tax year
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
, in case any party were to be
audited
An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
by the
IRS
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax ...
.
Other countries
The leaseback concept has spread to other European countries, including
Spain
, image_flag = Bandera de España.svg
, image_coat = Escudo de España (mazonado).svg
, national_motto = ''Plus ultra'' (Latin)(English: "Further Beyond")
, national_anthem = (English: "Royal March")
, i ...
and
Switzerland. Typical property available are studios, apartments, and villas. They are situated near
ski
A ski is a narrow strip of semi-rigid material worn underfoot to glide over snow. Substantially longer than wide and characteristically employed in pairs, skis are attached to ski boots with ski bindings, with either a free, lockable, or partia ...
areas,
beach resort
A seaside resort is a resort town, town, village, or hotel that serves as a Resort, vacation resort and is located on a coast. Sometimes the concept includes an aspect of official accreditation based on the satisfaction of certain requirements, suc ...
s, or
golf course
A golf course is the grounds on which the sport of golf is played. It consists of a series of holes, each consisting of a tee box, a fairway, the rough and other hazards, and a green with a cylindrical hole in the ground, known as a "cup". ...
s.
Commercial real estate
A sale-and-leaseback is typically a commercial
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
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
A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping ce ...
), and then leases the property back at a
rental
Renting, also known as hiring or letting, is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for a ...
rate and lease term that is acceptable to the new
investor
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
/
landlord
A landlord is the owner of a house, apartment, condominium, land, or real estate which is rented or leased to an individual or business, who is called a tenant (also a ''lessee'' or ''renter''). When a juristic person is in this position, t ...
. The lease term and rental rate are based on the new investor/landlord's
financing
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...
costs, the lessee's
credit rating
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
...
, and a market
rate of return
In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment, such as interest payments, coupons, cas ...
, based on the initial cash investment by the new investor/landlord.
The reasons and advantages for a
seller
Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale.
The seller, or the provider of the goods or services, completes a sale in r ...
/
lessee
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industria ...
are varied, but the most common are:
* Help
finance expansion of the existing business, purchase new plant equipment, or
invest
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
in new business opportunities. A sale leaseback enables a corporation to access more capital than traditional financing methods. When the real estate is sold to an outside investor, the corporation receives 100% of the value of the property. Traditional financing is limited to a loan-to-value ratio or debt-coverage-ratio.
* Help pay down
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
and improve the company's
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a Partnersh ...
.
* 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 financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
. In addition, the seller/lessee as a
tenant can deduct all
rent
Rent may refer to:
Economics
*Renting, an agreement where a payment is made for the temporary use of a good, service or property
*Economic rent, any payment in excess of the cost of production
*Rent-seeking, attempting to increase one's share of e ...
payments as a legitimate business
expense
An expense is an item requiring an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...
on its annual tax returns.
* Helps limit risks associated with owning real estate such as cyclical market variations.
[Sale Leaseback](_blank)
CookCRE , Sale Leaseback Advisory
The advantages for an
investor
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
/
landlord
A landlord is the owner of a house, apartment, condominium, land, or real estate which is rented or leased to an individual or business, who is called a tenant (also a ''lessee'' or ''renter''). When a juristic person is in this position, t ...
are:
* Fair return on the
investment in the form of
rent
Rent may refer to:
Economics
*Renting, an agreement where a payment is made for the temporary use of a good, service or property
*Economic rent, any payment in excess of the cost of production
*Rent-seeking, attempting to increase one's share of e ...
during the
lease
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
term, and ownership of a depreciable
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
already occupied by a reliable
tenant.
* Long-term, fully leased
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
with a guaranteed
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. Fo ...
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.
* Ability to invest in real estate with a tenant who is already familiar with the property.{{citation needed, date=June 2017
Aviation
Leaseback is also commonly used in
general aviation
General aviation (GA) is defined by the International Civil Aviation Organization (ICAO) as all civil aviation aircraft operations with the exception of commercial air transport or aerial work, which is defined as specialized aviation services ...
, with buyers using the scheme to let flight schools and other
FBOs use their aircraft.
Leaseback is very often used in commercial aviation to essentially take back the cash invested in assets.
Airlines
An airline is a company that provides air transport services for traveling passengers and freight. Airlines use aircraft to supply these services and may form partnerships or alliances with other airlines for codeshare agreements, in whic ...
, for example, sell
aircraft
An aircraft is a vehicle that is able to fly by gaining support from the air. It counters the force of gravity by using either static lift or by using the dynamic lift of an airfoil, or in a few cases the downward thrust from jet engine ...
and engines to lessors, banks or other financial institutions who, in turn, lease the assets back to them. Tax deductions can also be realized by the airline since the asset is no longer owned but leased. Due to the high price of aircraft and engines, especially new, the cash from such a leaseback is used by airlines to improve their financial performance.
Industrial equipment
The leaseback concept has also spread to
industry
Industry may refer to:
Economics
* Industry (economics), a generally categorized branch of economic activity
* Industry (manufacturing), a specific branch of economic activity, typically in factories with machinery
* The wider industrial sector ...
, mostly for industrial equipment. A long-standing example is the railroad industry, in which locomotives and other rolling stock are purchased on behalf of the railroad by an 'equipment trust' set up by a bank, financing the original purchase cost with the lease payments. A company sells some of its equipment to a
lessor
Lessor may refer to:
* Lessor (leasing), the owner of leased property or the agent authorized on the owner's behalf
* Lessor, Wisconsin, a town in U.S.A.
* Lessor Township, Minnesota, U.S.A.
See also
* Lesser
{{disambig, geo ...
, such as a
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
or another financial institution, which leases the equipment back to the company. Thus the company is no longer the owner of the equipment but keeps the use of it. This commercial transaction allows two companies to have at their immediate disposal the cash to make
investments
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
in new business opportunities.
See also
*
Aircraft lease
Aircraft leases are leases used by airlines and other aircraft operators. Airlines lease aircraft from other airlines or leasing companies for two main reasons: to operate aircraft without the financial burden of buying them, and to provide tempora ...
*
Lease-option
*
Rent-to-own
References
Sales
Leasing
Contract law
Commercial real estate