Leaseback
Encyclopedia
Leaseback, short for sale-and-leaseback, is a financial transaction
, where one sells an asset and leases 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 assets, notably real estate
and planes, trains and automobiles, and the purposes are varied, including financing, accounting, and taxing.
, while keeping proper track of the ongoing worth and profitability of the asset. Another one 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 industry.
is a sale-and-leaseback of toxic asset
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."
for more than 30 years, and there are significant tax advantages. Under the scheme, the purchaser may use the property usually between 1 to 8 weeks per year (with a maximum of 6 months per year). The French government encourages the development of leaseback schemes in touristic areas to alleviate shortages in rental accommodation. The government rebates the local VAT (which is 19.6%), when the property is purchased off plan.
, typically real estate
, and then leases it back from the buyer
. In this way the transaction functions as a loan
, with payments taking the form of rent
. 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
. For example, developers of master-planned communities will often sell the model home 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 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, in case any party were to be audited by the IRS.
and Switzerland
. Typical property available are studios, apartments, and villas. They are situated near ski
areas, beach resorts, or golf course
s.
transaction in which one party, often a corporation, sells its corporate real estate
assets to another party, such as an institutional investor
, or a real estate investment trust (REIT), and then leases the property back at a rental rate and lease term that is acceptable to the new investor
/landlord
. The lease term and rental rate are based on the new investor/landlord's financing costs, the lessee's credit rating
, and a market rate of return
, based on the initial cash investment by the new investor/landlord.
The reasons and advantages for a seller/lessee are varied, but the most common are:
The advantages for an investor
/landlord
are:
, with buyers using the scheme to let flight schools and other FBO
s use their aircraft.
Leaseback is very often used in commercial aviation to essentially take back the cash invested in assets. Airlines, for example, sell aircraft
and engines to lessors, banks or other financial institutions who, in turn, lease the assets back to them. Tax deductions can also be realized by the airline since the asset is no longer owned but leased. Due to the high price of aircraft and engines, especially new, the cash from such a leaseback are used by airlines to improve their financial performance.
, for most industrial equipments. A company sells some of its equipments to a lessor
, such as a bank
or another financial institution, which lease these equipments back to the company. Thus the company is no more the owner of the equipments but keeps the use of its. This commercial transaction allow to companies to have at one’s disposal immediately the cash to make investments in new businesses opportunities.
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
, where one sells an asset and leases 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 assets, notably real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
and planes, trains and automobiles, and the purposes are varied, including financing, accounting, and taxing.
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-to rate. One reason for a leaseback is to transfer ownership to a holding companyHolding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
, while keeping proper track of the ongoing worth and profitability of the asset. Another one 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 industry.
Possible solution to toxic banking assets
According to Robert Peston, Business Editor for the BBC, one option being considered for dealing with the subprime mortgage crisisSubprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
is a sale-and-leaseback of toxic asset
Toxic asset
Toxic asset is a popular term for certain financial assets whose value has fallen significantly and for which there is no longer a functioning market, so that such assets cannot be sold at a price satisfactory to the holder...
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 & Asia.France
Leaseback of residential property has been popular in FranceFrance
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
for more than 30 years, and there are significant tax advantages. Under the scheme, the purchaser may use the property usually between 1 to 8 weeks per year (with a maximum of 6 months per year). The French government encourages the development of leaseback schemes in touristic areas to alleviate shortages in rental accommodation. The government rebates the local VAT (which is 19.6%), when the property is purchased off plan.
United States
A "sale/leaseback" or "sale and leaseback" is a transaction in which the owner of a property sells an assetAsset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
, typically real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
, and then leases it back from the buyer
Buyer
When someone gets characterised by their role as buyer of certain assets, the term "buyer" gets new meaning:A "buyer" or merchandiser is a person who purchases finished goods, typically for resale, for a firm, government, or organization...
. In this way the transaction functions as a loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
, with payments taking the form of rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
. 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 (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
. For example, developers of master-planned communities will often sell the model home 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 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, in case any party were to be audited by the IRS.
Other countries
The leaseback concept has spread to other European countries, including SpainSpain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
and Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
. Typical property available are studios, apartments, and villas. They are situated near ski
Ski
A ski is a long, flat device worn on the foot, usually attached through a boot, designed to help the wearer slide smoothly over snow. Originally intended as an aid to travel in snowy regions, they are now mainly used for recreational and sporting purposes...
areas, beach resorts, or golf course
Golf course
A golf course comprises a series of holes, each consisting of a teeing ground, fairway, rough and other hazards, and a green with a flagstick and cup, all designed for the game of golf. A standard round of golf consists of playing 18 holes, thus most golf courses have this number of holes...
s.
Commercial real estate
A sale-and-leaseback is typically a commercial real estateReal estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
transaction in which one party, often a corporation, sells its corporate real estate
Corporate Real Estate
Corporate real estate is a term used to describe the real property held or used by a business enterprise or organization for its own operational purposes...
assets to another party, such as an institutional investor
Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
, or a real estate investment trust (REIT), and then leases the property back at a rental rate and lease term that is acceptable to the new investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
/landlord
Landlord
A landlord is the owner of a house, apartment, condominium, or real estate which is rented or leased to an individual or business, who is called a tenant . When a juristic person is in this position, the term landlord is used. Other terms include lessor and owner...
. The lease term and rental rate are based on the new investor/landlord's financing costs, the lessee's credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
, and a market rate of return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
, based on the initial cash investment by the new investor/landlord.
The reasons and advantages for a seller/lessee are varied, but the most common are:
- Help financeFinance"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
expansion of the existing business, purchase new plant equipment, or invest in new business opportunities. - Help pay down debtDebtA debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
and improve the company's balance sheetBalance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
. - Help reduce the seller/lessee's business income tax liabilityLegal liabilityLegal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
caused by the appreciationAppreciationIn accounting, appreciation of an asset is an increase in its value. In this sense it is the reverse of depreciation, which measures the fall in value of assets over their normal life-time...
in value (land only) of its corporate real estate assets. In addition, the seller/lessee as a tenantLeasehold estateA leasehold estate is an ownership of a temporary right to land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord....
can deduct all rentRentingRenting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
payments as a legitimate business expenseExpenseIn common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
on its annual tax returns.
The advantages for an investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
/landlord
Landlord
A landlord is the owner of a house, apartment, condominium, or real estate which is rented or leased to an individual or business, who is called a tenant . When a juristic person is in this position, the term landlord is used. Other terms include lessor and owner...
are:
- Fair return on the investmentInvestmentInvestment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
in the form of rentRentingRenting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
during the leaseLeaseA lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
term, and ownership of a depreciable assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
already occupied by a reliable tenantLeasehold estateA leasehold estate is an ownership of a temporary right to land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord....
. - Long-term, fully leased assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
with a guaranteed incomeIncomeIncome is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
stream. - For income-taxIncome taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
purposes, the investor/landlord can take an expense deduction for an investmentInvestmentInvestment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
in a depreciableDepreciationDepreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
property to allow for the recovery of the cost of the investment.
Aviation
Leaseback is also commonly used in general aviationGeneral aviation
General aviation is one of the two categories of civil aviation. It refers to all flights other than military and scheduled airline and regular cargo flights, both private and commercial. General aviation flights range from gliders and powered parachutes to large, non-scheduled cargo jet flights...
, with buyers using the scheme to let flight schools and other FBO
Fixed base operator
A Fixed-base operator or commonly abbreviated FBO is a term developed in the United States after the passage of the Air Commerce Act of 1926...
s use their aircraft.
Leaseback is very often used in commercial aviation to essentially take back the cash invested in assets. Airlines, for example, sell aircraft
Aircraft
An aircraft is a vehicle that is able to fly by gaining support from the air, or, in general, the atmosphere of a planet. An aircraft counters the force of gravity by using either static lift or by using the dynamic lift of an airfoil, or in a few cases the downward thrust from jet engines.Although...
and engines to lessors, banks or other financial institutions who, in turn, lease the assets back to them. Tax deductions can also be realized by the airline since the asset is no longer owned but leased. Due to the high price of aircraft and engines, especially new, the cash from such a leaseback are used by airlines to improve their financial performance.
Industrial equipments
The leaseback concept has also spread to the industryIndustry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
, for most industrial equipments. A company sells some of its equipments to a lessor
Lessor
Lessor is the name of two places in the United States:*Lessor, Wisconsin*Lessor Township, Minnesota...
, such as a bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
or another financial institution, which lease these equipments back to the company. Thus the company is no more the owner of the equipments but keeps the use of its. This commercial transaction allow to companies to have at one’s disposal immediately the cash to make investments in new businesses opportunities.