Sale-Leaseback Transaction: Definition & Overview

KEY TAKEAWAYS

• An asset in a sale-leaseback is something that is sold to a seller and then leased back for a certain duration. 
• Business owners can benefit from this by not having equity in the asset, meaning it’s recognized as an investment instead of a property. 
• Builders or other companies that have high-cost fixed assets are some of the most common users of sale-leasebacks.

What Is a Sale-Leaseback?

Basically, a sale-leaseback is a type of arrangement that allows a company that sells an asset to lease it back from the purchaser. This can also get commonly referred to as a sale-and-leaseback or just a leaseback. The new owner can then collect things like rent payments or lease payments from the original owner. 

This would happen throughout an agreed-upon time period and the agreement would also include the lease duration. Once the sale of the asset happens, these details would kick in. 

One of the biggest benefits of a sale-leaseback is that a company that sells the asset can recognize it as an investment instead of a property. This is because they wouldn’t have equity in the asset any longer. Some of the most common assets in a sale-leaseback can include machinery, equipment, vacant land, or property. 

As well, sale-leaseback arrangements can be most common in commercial real estate. In this case, the purchaser of the property would become the lessor and the seller the lessee. 

How Does a Sale-Leaseback Work?

With a sale-leaseback, it all begins with an asset. The original owner of the asset would then sell it to someone else. Then, the original owner would lease back the asset from the new owner. The length this lasts for is going to depend on the arrangement. 

Who Uses Sale-Leaseback and Why?

Some of the most common users of a sale-leaseback include builders with large pieces of equipment or those in the real estate investment industry. Generally, these include things like property and land. Sale-leasebacks can also be common in the aerospace sector.

This happens frequently when a company wants to utilize the original cash they invested in an asset for other reasons. But, they still might want to utilize the asset to help with business operations. It’s an attractive method of raising additional capital.

What Are the Advantages and Disadvantages of Sale-Leaseback?

There can be several reasons that a sale-leaseback is beneficial for business owners. However, there can also be a few disadvantages worth knowing about and understanding. Let’s take a closer look at both. 

Advantages 

• Off-balance-sheet financing: When an asset gets sold in a sale-leaseback agreement, the company can choose to list the asset as an operating expense instead of a liability on their balance sheets. When you have fewer liabilities, it can indicate that your business is likely to pay off debts which can lead to better borrowing from lenders. 
• Control of an asset: Having a triple net lease (NNN) can allow you to maintain control of an asset without having to tie up cash in equity. So, when the lease term ends it can provide some additional options. You could either repurchase the asset, return and relinquish it, or even negotiate a new lease renewal.
• Tax benefits: You might be able to write off the lease payment entirely as a business expense with a sale-leaseback arrangement. 
• Increase cash flow: The previous owner of the asset can access additional capital that would normally be tied up in the asset. This means that the money can get used for other things, such as paying off debts or expanding business operations. 

Disadvantages 

• Potential loss of the asset: Once the sale-leaseback agreement ends, the new owner might not allow you to repurchase the asset. One way to help avoid this is to have a clause in the agreement with the option to repurchase. 
• Less flexibility: There becomes fewer options to replace, relocate, or renovate assets through a sale-leaseback. 
• Fixed payments: In the case of a real estate sale-leaseback, you could get locked into rental payments and an interest rate that you can’t change. However, you could still ask the new owner about potential changes and see if they agree to change the original terms.

Summary

A sale-leaseback can be an effective arrangement to sell an asset. The new owner can collect rent or lease payments from the original owner. Plus, businesses can benefit from this since they can free up capital by listing the asset as an investment instead of property after they sell it.

It’s important to discuss the purchase price and other details with the buyer. For example, you can include flexible lease terms, outline the entire lease payment, and discuss lease renewal options. 

This type of lease agreement can take a costly asset and provide more access to cash. Current cash flow needs can get remedied and it can be most common in real estate transactions, for example.