The “sale-leaseback” concept is not a new one, but it is one that is being utilized more and more in today’s economic climate as the financial and tax benefits can be numerous for both parties. In its simplest form, a sale-leaseback is a transaction in which the owner of property sells the property and simultaneously leases it back from the purchaser. The purposes of a sale-leaseback are typically that of financing, accounting and/or tax.
The benefits of a sale-leaseback can be quite substantial for both the seller/lessee and buyer/lessor. The primary benefits to (and thus motivation of) the seller/lessee in a normal sale-leaseback are typically as follows:
• An immediate influx of cash while retaining the use of the property
• The cash received is 100% of the fair market value (as compared to the 75%-80% of fair market value with conventional financing)
• Improves the company balance sheet by increasing its current ratio
• Tax deductible rental payments (as compared to conventional financing where only interest is deductible)
• Deductible loss or offsetting gain on the sale of the property (depending on the gain or loss to be recognized on the sale and the need of the company)
Obviously, in order to induce a buyer/lessor to enter into such a transaction there needs to be substantial benefit to them as well. Accordingly, the primary benefits to (and thus motivation of) the buyer/lessor in a normal sale-leaseback are typically as follows:
• Higher rate of return (as compared to if it would simply loan money to the seller instead of purchasing the property)
• A hedge against inflation since any appreciation in value accrues to the owner (this benefit is negated where the agreement allows the seller/lessee the option to repurchase)
• Secured long-term investment requiring little or no ongoing management and providing a guaranteed return
• Ability to take depreciation deductions where improved land is involved
It is apparent that a sale-leaseback transaction is one that can provide very real benefits to each party involved, but such an agreement needs to be properly structured in order to avoid certain risks associated with the IRS’s scrutiny of the transaction. If not properly structured and orchestrated, the IRS may attempt to disallow deductions for such things as depreciation, rental payments, interest and investment tax credit by the parties to a putative sale-leaseback arrangement, on the grounds that the arrangement actually constituted a financing device or exchange of like-kind property. To discuss the benefits, risks and requirements of a sale-leaseback arrangement please contact us and we can discuss the situation in greater detail. Each situation is unique and should be treated as such.
The benefits of a sale-leaseback can be quite substantial for both the seller/lessee and buyer/lessor. The primary benefits to (and thus motivation of) the seller/lessee in a normal sale-leaseback are typically as follows:
• An immediate influx of cash while retaining the use of the property
• The cash received is 100% of the fair market value (as compared to the 75%-80% of fair market value with conventional financing)
• Improves the company balance sheet by increasing its current ratio
• Tax deductible rental payments (as compared to conventional financing where only interest is deductible)
• Deductible loss or offsetting gain on the sale of the property (depending on the gain or loss to be recognized on the sale and the need of the company)
Obviously, in order to induce a buyer/lessor to enter into such a transaction there needs to be substantial benefit to them as well. Accordingly, the primary benefits to (and thus motivation of) the buyer/lessor in a normal sale-leaseback are typically as follows:
• Higher rate of return (as compared to if it would simply loan money to the seller instead of purchasing the property)
• A hedge against inflation since any appreciation in value accrues to the owner (this benefit is negated where the agreement allows the seller/lessee the option to repurchase)
• Secured long-term investment requiring little or no ongoing management and providing a guaranteed return
• Ability to take depreciation deductions where improved land is involved
It is apparent that a sale-leaseback transaction is one that can provide very real benefits to each party involved, but such an agreement needs to be properly structured in order to avoid certain risks associated with the IRS’s scrutiny of the transaction. If not properly structured and orchestrated, the IRS may attempt to disallow deductions for such things as depreciation, rental payments, interest and investment tax credit by the parties to a putative sale-leaseback arrangement, on the grounds that the arrangement actually constituted a financing device or exchange of like-kind property. To discuss the benefits, risks and requirements of a sale-leaseback arrangement please contact us and we can discuss the situation in greater detail. Each situation is unique and should be treated as such.