Can anyone explain what a sale leaseback is?

Roray,

In short, a sale/leaseback is a transaction wherein the owner of an asset sells that asset and then leases it back from the buyer. The purpose of the leaseback is to free up the original owner's capital (i.e. the owner receives cash) while allowing the owner to retain possession and use of the property.

A leaseback can be beneficial for the buyer and seller alike. The seller attains a lump sum of cash quickly and the buyer acquires a lower than market value purchase price, along with a long-term lease at a premium rate.

This is generally done for real or personal property such as real estate, buildings, or machinery and equipment as well as other types of assets, The reasons for doing this are varied, but include a need for cash, as well as accounting, and tax reasons.

Other things to note are that the seller may be able to negotiate a buyback option to re-acquire the property at a future date. Also, the buyer may attain certain tax advantages after purchasing the property such as depreciation.

One note of caution is that if a firm files for bankruptcy shortly after the sale and the IRS or bankruptcy court believes that the seller arranged the leaseback to hide assets, the transaction can reversed. Ownership of the property will revert back to the original owner and the property may be confiscated in order to resolve tax liens or payments due to other creditors and the buyer could lose his investment.

Use caution when considering a leaseback agreement and be sure to understand which party is responsible for things like repair and maintence, insurance, and the like.

Tom Hogan
Principal
Level 1 Resources