Sale and leaseback definition
/What is a Sale and Leaseback?
A sale and leaseback is an arrangement where an entity sells one of its assets to a lender and then immediately leases it back for a guaranteed minimum time period. By doing so, the entity obtains cash from the sale of the asset that it may be able to use more profitably elsewhere, while the lender obtains a guaranteed lease. This approach also provides the seller with the cash to pay down its debt, thereby improving the financial position reported on its balance sheet. The downside from the perspective of the seller is that the seller can no longer charge off any depreciation expense related to the asset in question, which reduces the related tax benefit.
A sale and leaseback is typically used for a building, but can also be arranged for other large assets, such as production machinery, airplanes, and trains.
Advantages of Sale and Leasebacks
There are several advantages to using a sale and leaseback arrangement, which are as follows:
Cash availability. A sale and leaseback allows the owner of real estate to convert it into cash, which can then be used to fund operations, pay for asset purchases, or fund working capital.
More reported liquidity. A sale and leaseback creates a massive boost to the seller’s reported cash balance, which makes its balance sheet look much more liquid.
Fair value realization. The business can unlock all of the fair market value of the property; by comparison, a lender would allow significantly less if the organization were to use the property as collateral on a standard loan.
Locks in the interest rate. A fourth advantage is that the associated leasing arrangement locks in an interest rate for an extended period of time, which beats having to refinance a shorter-term loan multiple times.
Repurchase option. The seller may request the right to repurchase the property at some point in the future. This might be a good option if the seller has sufficient cash at a later date to re-acquire the asset, and gives it long-term control over the property.