Leaseback, short for "sale-and-leaseback", is a

financial transaction A financial transaction is an Contract, agreement, or communication, between a buyer and seller to exchange goods, Service (economics), services, or assets for payment. Any transaction involves a change in the status of the finances of two or mo ...

in which one sells an

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

and

lease A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...

s it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done for

fixed asset Fixed assets (also known as long-lived assets or property, plant and equipment; PP&E) is a term used in accounting for assets and property that may not easily be converted into cash. They are contrasted with current assets, such as cash, bank ac ...

s, notably real estate, as well as for

durable Durability is the ability of a physical product to remain functional, without requiring excessive maintenance or repair, when faced with the challenges of normal operation over its design lifetime. There are several measures of durability in us ...

and

capital good Capital and its variations may refer to: Common uses * Capital city, a municipality of primary status ** Capital region, a metropolitan region containing the capital ** List of national capitals * Capital letter, an upper-case letter Econ ...

s such as airplanes and trains. The concept can also be applied by national governments to territorial assets; prior to the

Falklands War The Falklands War () was a ten-week undeclared war between Argentina and the United Kingdom in 1982 over two British Overseas Territories, British dependent territories in the South Atlantic: the Falkland Islands and Falkland Islands Dependenci ...

, the government of the United Kingdom proposed a leaseback arrangement whereby the Falklands Islands would be transferred to

Argentina Argentina, officially the Argentine Republic, is a country in the southern half of South America. It covers an area of , making it the List of South American countries by area, second-largest country in South America after Brazil, the fourt ...

, with a 99-year leaseback period, and a similar arrangement, also for 99 years, had been in place prior to the

handover of Hong Kong The handover of Hong Kong from the United Kingdom to the People's Republic of China was at midnight on 1 July 1997. This event ended 156 years of British rule in the former colony, which began in 1841. Hong Kong was established as a specia ...

to mainland China. Leaseback arrangements are usually employed because they confer financing, accounting or taxation benefits.

Leaseback arrangements

After purchasing an asset, the owner enters a long-term agreement by which the property is leased back to the seller at an agreed rate. One reason for a leaseback is to transfer ownership to a

holding company A holding company is a company whose primary business is holding a controlling interest in the Security (finance), securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own Share ...

while keeping proper track of the ongoing worth and profitability of the asset. Another reason is for the seller to raise money by offloading a valuable asset to a buyer who is presumably interested in making a long-term secured investment. Leaseback arrangements are common in the

REIT A real estate investment trust (REIT, pronounced "reet") is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of real estate, including office and apartment buildings, studios, warehouses, hos ...

industry.

Possible solution to toxic banking assets

According to Robert Peston, one-time Business Editor for the BBC, one option being considered for dealing with the

subprime mortgage crisis The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...

is a sale-and-leaseback of

toxic asset A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market. Such assets cannot be sold at a price satisfactory to the holder. Because assets are offset against liabilities and fre ...

s. Peston says "a sale-and-leaseback between the banks and the state has two supreme advantages: there's no need to value the poisonous assets; and losses on those stinky assets would be absorbed by the banks in manageable chunks over about 10 years."

Real estate

Leaseback arrangements are popular in France, the United States, United Kingdom, and throughout Australia and Asia, including, more recently, in India.

France

Leaseback of residential property has been popular in

France France, officially the French Republic, is a country located primarily in Western Europe. Overseas France, Its overseas regions and territories include French Guiana in South America, Saint Pierre and Miquelon in the Atlantic Ocean#North Atlan ...

for more than 30 years, and there are significant tax advantages. Under the scheme, the purchaser may use the property usually between 1 and 8 weeks per year (with a maximum of 6 months per year). The

French government The Government of France (, ), officially the Government of the French Republic (, ), exercises Executive (government), executive power in France. It is composed of the Prime Minister of France, prime minister, who is the head of government, ...

encourages the development of leaseback schemes in touristic areas to alleviate shortages in rental accommodation. The government rebates the local

VAT A value-added tax (VAT or goods and services tax (GST), general consumption tax (GCT)) is a consumption tax that is levied on the value added at each stage of a product's production and distribution. VAT is similar to, and is often compared wi ...

(which is 19.6%), when the property is purchased off plan. The scheme works by purchasing a freehold property. You become the legal owner. The property is then leased back to the developer or a management company. Under the leaseback scheme the government also refunds to you the VAT normally charged on a new build properties (currently 19.6%). The owner is then guaranteed a rental income throughout the period of the lease. The net return to the owner varies between developments but is typically between 4% and 6%. This compares very favourably with a typical 20 year fixed rate mortgage of around 3.75%, and variable rate mortgages which are lower. It can be seen how the rental income can be used in respect of the mortgage payments. Loans of between 75% and 85% are available depending upon circumstances. The rental yield is also index linked annually to construction costs, which means the rental income currently increases by approximately 2.5%. As in the UK there are tax allowances in respect of mortgage payments which can be offset against income. The lease typically lasts for between 9 and 11 years, after which the management company has the option to either renew, or the property can be sold, or rented out and held privately by the owner. The purchaser/owner can also enjoy periods of usage free of charge through the year, depending upon the terms of the lease. These terms normally allows for between 4 and 6 weeks free usage each year. The management company is responsible for the maintenance of the property including the maintenance of furnishings which are often included in the purchase price. The developer is also responsible for insuring the building and its contents. It also pays for some of the property taxes and all the utility costs.

United Kingdom

In the United Kingdom, a form of leaseback known as

sale and rent back Sale and rent back is a form of property transaction involving the expeditious sale of an owner occupier's residence to a landlord or property company and renting it back from the new owner. This may be done by the occupier to release equity from ...

was the subject of a 2014

Supreme Court In most legal jurisdictions, a supreme court, also known as a court of last resort, apex court, high (or final) court of appeal, and court of final appeal, is the highest court within the hierarchy of courts. Broadly speaking, the decisions of ...

case that found many such arrangements had been perpetrated fraudulently.

United States

A "sale/leaseback" or "sale and leaseback" is a transaction in which the owner of a property sells an

, typically real estate, and then

leases A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the Lessor (leasing), ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are l ...

it back from the

buyer Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual o ...

. In this way the transaction functions as a

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

, with payments taking the form of

rent Rent may refer to: Economics *Renting, an agreement where a payment is made for the temporary use of a good, service or property *Economic rent, any payment in excess of the cost of production *Rent-seeking, attempting to increase one's share of e ...

. Due to the lack of financing available in today's market, many American businesses are increasingly turning to sale-and-leasebacks to provide quick

capital Capital and its variations may refer to: Common uses * Capital city, a municipality of primary status ** Capital region, a metropolitan region containing the capital ** List of national capitals * Capital letter, an upper-case letter Econom ...

. For example, developers of master-planned communities will often sell the

model home A show house, also called a model home or display home, is a "display" version of manufactured homes, or houses in a subdivision. They are used on newly built developments to show the living space and features of homes available. Show homes are ...

to a buyer before the community is sold out, leasing it back from the buyer for a period of up to two years. In some arrangements, the current

lessee A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...

will give the option to buy the asset back at the end of the lease. Typically, if the original owner were to buy back the asset, it would take place at the end of the

tax year A fiscal year (also known as a financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. La ...

, in case any party were to be

audited An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon." Auditing al ...

by the

IRS The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...

Other countries

The leaseback concept has spread to other European countries, including

Spain Spain, or the Kingdom of Spain, is a country in Southern Europe, Southern and Western Europe with territories in North Africa. Featuring the Punta de Tarifa, southernmost point of continental Europe, it is the largest country in Southern Eur ...

and

Switzerland Switzerland, officially the Swiss Confederation, is a landlocked country located in west-central Europe. It is bordered by Italy to the south, France to the west, Germany to the north, and Austria and Liechtenstein to the east. Switzerland ...

. Typical property available are studios, apartments, and villas. They are situated near

ski Skis are runners, attached to the user's feet, designed to glide over snow. Typically employed in pairs, skis are attached to ski boots with ski bindings, with either a free, lockable, or partially secured heel. For climbing slopes, ski skins c ...

areas,

beach resort A seaside resort is a city, town, village, or hotel that serves as a vacation resort and is located on a coast. Sometimes the concept includes an aspect of an official accreditation based on the satisfaction of certain requirements such as in t ...

s, or

golf course A golf course is the grounds on which the sport of golf is played. It consists of a series of holes, each consisting of a teeing ground, tee box, a #Fairway and rough, fairway, the #Fairway and rough, rough and other hazard (golf), hazards, and ...

Commercial real estate

A sale-and-leaseback is typically a commercial real estate transaction in which one party, often a corporation, sells its corporate real estate assets to another party, such as an

institutional investor An institutional investor is an entity that pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked ...

, or a real estate investment trust (

), and then leases the property back at a

rental Renting, also known as hiring or letting, is an agreement where a payment is made for the use of a good, service or property owned by another over a fixed period of time. To maintain such an agreement, a rental agreement (or lease) is sign ...

rate and lease term that is acceptable to the new

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...

landlord A landlord is the owner of property such as a house, apartment, condominium, land, or real estate that is rented or leased to an individual or business, known as a tenant (also called a ''lessee'' or ''renter''). The term landlord appli ...

. The lease term and rental rate are based on the new investor/landlord's

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

costs, the lessee's

credit rating A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government). It is the practice of predicting or forecasting the ability of a supposed debtor to pay back the debt or default. The ...

, and a market

rate of return In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment over a specified time period, such as i ...

, based on the initial cash investment by the new investor/landlord. The reasons and advantages for a

seller Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. A period during which goods are sold for a reduced price may also be referred ...

are varied, but the most common are: * Help

finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

expansion of the existing business, purchase new plant equipment, or

invest Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

in new business opportunities. A sale leaseback enables a corporation to access more capital than traditional financing methods. When the real estate is sold to an outside investor, the corporation receives 100% of the value of the property. Traditional financing is limited to a loan-to-value ratio or debt-coverage-ratio. * Help pay down

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

and improve the company's

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

. * Help reduce the seller/lessee's business income tax liability caused by the appreciation in value (land only) of its corporate real estate

assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

. In addition, the seller/lessee as a tenant can deduct all

payments as a legitimate business

expense An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition i ...

on its annual tax returns. * Helps limit risks associated with owning real estate such as cyclical market variations.Sale Leaseback
CookCRE , Sale Leaseback Advisory The advantages for an

are: * Fair return on the

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

in the form of

during the

term, and ownership of a depreciable

already occupied by a reliable tenant. * Long-term, fully leased

with a guaranteed

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...

stream. * For income-tax purposes, the investor/landlord can take an expense deduction for an

in a depreciable property to allow for the recovery of the cost of the investment. * Ability to invest in real estate with a tenant who is already familiar with the property.{{citation needed, date=June 2017

Aviation

Leaseback is also commonly used in

general aviation General aviation (GA) is defined by the International Civil Aviation Organization (ICAO) as all civil aviation aircraft operations except for commercial air transport or aerial work, which is defined as specialized aviation services for other ...

, with buyers using the scheme to let flight schools and other FBOs use their aircraft. Leaseback is very often used in commercial aviation to essentially take back the cash invested in assets.

Airlines An airline is a company that provides air transport services for traveling passengers or freight (cargo). Airlines use aircraft to supply these services and may form partnerships or alliances with other airlines for codeshare agreements, in ...

, for example, sell

aircraft An aircraft ( aircraft) is a vehicle that is able to flight, fly by gaining support from the Atmosphere of Earth, air. It counters the force of gravity by using either Buoyancy, static lift or the Lift (force), dynamic lift of an airfoil, or, i ...

and engines to lessors, banks or other financial institutions who, in turn, lease the assets back to them. Due to the high price of aircraft and engines, especially new, the cash from such a leaseback is used by airlines to improve their financial performance.

Industrial equipment

The leaseback concept has also spread to

industry Industry may refer to: Economics * Industry (economics), a generally categorized branch of economic activity * Industry (manufacturing), a specific branch of economic activity, typically in factories with machinery * The wider industrial sector ...

, mostly for industrial equipment. A long-standing example is the railroad industry, in which locomotives and other rolling stock are purchased on behalf of the railroad by an 'equipment trust' set up by a bank, financing the original purchase cost with the lease payments. A company sells some of its equipment to a

lessor Lessor is a participant of the lease who takes possession of the property and provides it as a leasing subject to the lessee for temporary possession. For example, in leasehold estate, the landlord is the lessor and the tenant is the lessee. The le ...

, such as a

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

or another financial institution, which leases the equipment back to the company. Thus the company is no longer the owner of the equipment but keeps the use of it. This commercial transaction allows two companies to have at their immediate disposal the cash to make

investments Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

in new business opportunities.

References

Sales Leasing Contract law Commercial real estate