The Sale Leaseback Transaction

Description and Benefits

The sale leaseback or purchase leaseback transaction provides an alternative method of ownership, investment, financing and risk allocation. It is a financial tool that can allow a business or entity to expand operations, reduce long-term risk and redirect capital funds from real estate to core operations. Contrary to conventional debt-financing, underutilized assets are converted into working capital making real estate assets work for the property owner.

The lease is typically a long-term "net" lease, with the seller/tenant having the option of repurchasing at a later time (the tenant normally has the right at any time during the lease to buy back the property, based upon the depreciated value. However, it is most advantageous to do so at the end of the lease, when the purchase price could be a nominal amount such as $1.00).

A sale leaseback or purchase leaseback transaction commonly involves the sale of a property to an investor who holds title and leases the property back to the former owner. The lease is typically a long-term "net" lease, with the seller/tenant having the option of repurchasing at a later time. Terms usually are for 15 to 20 years with options to include up to four (4) 5-year renewal periods.

The seller/tenant receives the *benefit of favorable 100% "financing" and still retains the use of the property (*seller/tenant receives market value of property). The buyer/landlord receives the tax benefit of depreciation and a guaranteed long-term rental. The sale leaseback process has been refined to make them easier, more certain and less costly than conventional debt financing. However, credit or credit rating is an important ingredient to be considered.

Many types of property are adaptable to such arrangements including office buildings, municipal buildings, corporate offices and headquarters buildings, other commercial or retail buildings and stores, restaurants, research and development facilities, power plants, cell phone towers, petro chemical facilities, industrial warehouses, water sewer treatment facilities, bridge and tunnel toll operations, airports, hotels and manufacturing plants.

There are generally no restrictions on the use of funds provided by sale leaseback financing. Examples are build-to-suit or expansion, debt consolidation or reduction, operating capital, or for investment purposes. Capital improvements built by the lessee may be amortized over the period of the lease.

The net proceeds from the sale of the real estate appear as an asset on the balance sheet as additional cash (minus provisions for income taxes as a result of a gain on the sale). The net worth of the company is increased on the balance sheet because, in most cases, the equity in real estate realized by a company in a sale leaseback is greater than the net book value of the property. If the transaction is properly structured, the total rent is a deductible item for income tax purposes. This has the effect of deduction for non-depreciable land, since the rent includes the right to use the land.

The seller is assured of the right to occupy the property on a long-term basis on items which he has negotiated for his benefit. The seller has the use of the property as though he owned it, without having capital invested in it.

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