§ 19.08 Sale-Leaseback Arrangements—An Alternative to the Traditional Lease
| Jurisdiction | United States |
| Publication year | 2022 |
§ 19.08 Sale-Leaseback Arrangements—An Alternative to the Traditional Lease
[1]—In General
"The pace of sale-leaseback transactions has accelerated . . . as both publicly traded and privately held companies analyze the benefits and drawbacks" of such transaction.1 They are particularly popular for retail chains, gas stations and other commercial properties, including medical and other professionals' office buildings.
Sale-leasebacks provide a way to recover the capital spent to purchase and improve the property while continuing to occupy and control the property under a long-term lease.2 These arrangements are used as "a vehicle to recapitalize, improve balance sheets, and feed expansion efforts."3
"The lease side of the transaction is structured as an operating lease, which may improve the company's return on equity, return on assets, debt coverage ratios and allow cash from the sale of the real estate to be redeployed for a higher rate of return in the core businesses of the company." Sale-leasebacks can be particularly advantageous "when a company has been unable to fully utilize its real estate depreciation because of tax credits or loss carry forwards."4
Often a business may find that "the net present value of the rent under the lease is less than what the mortgage payments would be, if the property [were] simply mortgaged to pull out cash."5 Further, "since the lease is an operating lease, no liability is shown on the company's balance sheet for the long-term lease obligation, unlike mortgage debt, which is recorded as a liability of the company. Lease rental payments are fully deductible, for tax purposes, in the year paid."6
The tax and accounting aspects of a sale-leaseback transaction can be especially complicated, requiring sophisticated analysis by a team of legal, tax and accounting professionals to assure that all the pieces are properly lined up.7
Despite the benefits, there are a number of drawbacks to consider when contemplating a sale-leaseback arrangement. A sale-leaseback transaction "locks the company into a facility for a long term under the lease", which can be problematic if companies that will likely outgrow the space or that lack stellar credit or a stable operating history.8 "Capital gains taxes and depreciation recapture from a sale of the property also need to be carefully analyzed. There are significant GAAP accounting rules and federal tax rules governing sale-leasebacks that must be met to ensure the company obtains the desired accounting and tax treatment for the transaction."9
[2]—Advantages and Disadvantages of Sale-Leaseback Arrangements
Among the many benefits of a sale-leaseback to the owner/seller/lessee are it is among the quickest ways to raise money for a much-needed capital infusion and it enables the lessee to retain the property for operational needs.10 Further, it enables the lessee to pay down debt or reinvest in the business, depending on real estate markets, and the return may be higher than that gained from waiting for the asset value to appreciate.11
On average, final prices are higher for sale-leasebacks than for traditional vacant sales, so occupying the premises will likely make the property more attractive to prospective buyers than an empty space.12
Additionally, a "sale-leaseback unlocks full asset value for that piece of real estate, boosting the company's assets, equity and...
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