Sale-Leaseback Transactions: Pros and Cons

A sale-leaseback (also called a sale-and-leaseback or a leaseback) is an arrangement in which the owner of an asset sells it to a leasing company or lender, who then leases the asset back to the original owner. The new owner then collects lease payments or rent payments from the previous owner for an agreed-upon time period. This allows the selling business to recognize the asset as an investment rather than property, though they no longer have equity in the asset. Large pieces of equipment, machinery, property, or vacant land are common assets that are subject to sale-leaseback agreements.

Sale-leaseback arrangements are also common in commercial real estate transactions where the seller of the property becomes the lessee of the real estate and the purchaser is the lessor. These two parties often create a triple net lease (NNN) which is a type of lease agreement in which the tenant maintains total control of the property and pays property expenses—including real esta

There are many reasons that a sale-leaseback can be advantageous to business owners, including tax advantages and greater access to working capital.

1. 1. Greater cash flow: A sale-leaseback allows the previous owner to access capital that would otherwise be tied up in the ownership of the asset. This money can then be used for anything the lessee wants, from expanding their business to paying off debts.
2. 2. Freedom to set lease terms: Sale-leaseback arrangements will typically offer more flexible lease terms than a traditional lease or mortgage agreement since the two parties can negotiate terms independent of a traditional lending institution. The lessee and the lessor can set their own lease lengths and lower interest rates. Furthermore, both parties can avoid common financing fees such as legal fees or appraisal fees that they’d need to pay if they were financing the asset through a lender.
3. 3. Off-balance-sheet financing: After selling an asset in a typical sale-leaseback agreement, a company will have the option to list the leased asset as an operating expense rather than as a liability on the company’s balance sheets. Having fewer liabilities indicates that the business or individual is more likely to pay their debts, which makes them eligible to borrow from more lenders.
4. 4. Control of the asset: A triple net lease (NNN) allows the lessee to maintain total control of their asset without having any cash tied up in equity. At the end of the lease term, the lessee usually has a number of options. They can repurchase the asset for a negotiated purchase price, return and relinquish the asset, or negotiate lease renewal options.
5. 5. Tax benefits: With a sale-leaseback, businesses may be able to write off their entire lease payment as a business expense.

While a sale-leaseback transaction is a great way to get access to cash that would otherwise be tied up in a costly asset, there are some potential disadvantages to entering into a sale-leaseback agreement.

1. 1. Possible loss of asset: At the end of a sale-leaseback agreement, it is possible that the new owner will not allow the previous owner to repurchase the asset or property. To avoid this, some sale-leaseback agreements have a clause that requires an option to repurchase the asset.
2. 2. Fixed payments: For a real estate sale-leaseback, the seller/lessee will be locked into certain rental payments and interest rates that can’t be adjusted unless the new owner agrees to change the original terms.
3. 3. Less flexibility: The seller/lessee has fewer options to relocate, renovate, or replace equipment assets or property under a sale-leaseback. While the seller theoretically has control over the property or asset, they need to revise the contract in order to relocate or sell it.

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

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