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, as well as for
durable and capital goods such as airplanes and trains.
The concept can also be applied by national governments to territorial assets; prior to
the Falklands War, the government of the United Kingdom proposed a leaseback arrangement whereby
the Falklands Islands would be transferred to Argentina, 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 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 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 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 crisis
is a sale-and-leaseback of toxic assets.
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, including, more recently,
in India.
France Leaseback of residential property has been
popular in 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.
The French government encourages the development of leaseback schemes in touristic areas to
alleviate shortages in rental accommodation.
The government rebates the local VAT, 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.
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% to
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 States A "sale/leaseback" or "sale and leaseback"
is a transaction in which the owner of a property sells an asset, 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.
Other countries The leaseback concept has spread to other
European countries, including Spain and Switzerland.
Typical property available are studios, apartments, and villas.
They are situated near ski areas, beach resorts, or golf courses.
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, or a real estate investment
trust, 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:
Help finance expansion of the existing business, purchase new plant equipment, or invest in
new business opportunities.
Help pay down debt and improve the company's balance sheet.
Help reduce the seller/lessee's business income tax liability caused by the appreciation in
value of its corporate real estate assets.
In addition, the seller/lessee as a tenant can deduct all rent payments as a legitimate
business expense on its annual tax returns.
The advantages for an investor/landlord are: Fair return on the investment in the form
of rent during the lease term, and ownership of a depreciable asset already occupied by
a reliable tenant.
Long-term, fully leased asset with a guaranteed income stream.
For income-tax purposes, the investor/landlord can take an expense deduction for an investment
in a depreciable property to allow for the recovery of the cost of the investment.
Aviation Leaseback is also commonly used in general
aviation, 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, 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.
Industrial equipment The leaseback concept has also spread to industry,
mostly for industrial equipment.
A company sells some of its equipment to a lessor, such as a bank 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 to companies to have at their immediate disposal the cash
to make investments in new business opportunities.
See also Rent-to-own
Aircraft lease Lease-option
References ^ Daily Telegraph: Another campaign for the
Falklands, 14 March 2007 ^ "Peston's Picks: First Septic Bank".
BBC.
Retrieved 2013-07-03.
^ "Leaseback".
Investopedia.com. 2013-06-28.
Retrieved 2013-07-03.
^ http:netleaseinsider.blogspot.com/search?q=leaseback ^ Sichelman, Lew.
"Sale-Leaseback".
Retrieved 2011-11-07.
^ "Hipp, Jonathan W. "Technical Advice Memorandum No. 2003-46007 - Calkain Companies, Inc."
CALKAIN COMPANIES, INC.
- Your Source for Investment Real Estate.
Web.
20 July 2010".
Calkain.com.
Retrieved 2013-07-03.