Sale and Leaseback of Property
This is an agreement in which the owner of property sells that property
to a person or institution and then leases it back again for an agreed
period and rental.
Leaseback
is often used by companies that want to free up capital tied up in
buildings. The tenant/lessee often has some kind of option to buy back
the property at the end of the lease period.
Advantages
- Leasing normally represents 100% financing whereas a mortgage
company will not provide more than say 70-80% of the value of a
project.
- Negates
the need to raise potentially more expensive subordinated debt or
equity capital in the marketplace to finance expansion etc.
- Full amount of lease payments may be tax deductible to lessee; depreciation may be deductible to owner-lessor.
Disadvantages
- Lessee acts much as the owner of the property rather than as a
tenant paying for all repairs, maintenance, insurance and property
taxes during the currency of the lease. In equipment leasing parlance, this is a "dry lease."
- If lessee defaults, lessor loses its cash flow stream and must sell or lease the property.
- Improvements to the property and any increase in land value inure to the benefit of the landlord at the expiration of the lease.
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