Sale and Leaseback
Where your company is in a cash-scrapped situation or you are generating low return on assets due to holding on to idling or unproductive fixed assets or you want to have a lump sum cash to invest in other projects, it might be worthwhile to consider a financing technique called Sale and Leaseback.
The sale/leaseback is a financing technique that has been used in the United States since the 1940’s. Sale/leaseback transactions provide alternative methods of ownership, investment, financing and risk allocation
The transaction, in its most basic form, involves the sale of a property to an investor who holds title and leases the property back to the former owner. The lease is typically a long-term “net” lease, with the seller/tenant having the option of repurchasing at a later time
Main Purpose of Sale and Leaseback:
This is to free up the original owner’s capital while allowing the owner to retain possession and use of the property. The type of property involved can be anything from residential or commercial real estate to equipment or vehicles.
Advantages:
- Frees-up capital to be invested into the growth of your company, basically you are converting your fixed asset into liquid asset,
- Because of freeing the fixed assets into cash, it therefore improves both the liquidity and return on assets in the balance sheet,
- Negates the need to raise potentially more expensive capital in the marketplace to finance expansion etc.,
- Leasing normally represents 100% financing whereas a mortgage company will not provide more than say two-thirds of the value of a project,
- The seller/tenant reaps the benefit of favorable 100% “financing” and still retains the use of the property. The buyer/landlord receives the tax benefit of depreciation and a guaranteed long-term rental,
- The seller is now paying rental to the “landlord” whereby the rental is an allowable tax deductible item,
- Terms as long as 25 years,
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,
- Improvements to the property and any increase in land value inure to the benefit of the landlord at the expiration of the lease,
- Illustrated Example Of Sale And Leaseback-Tamaddan Berhad
- Recent Trend of Sale And Leaseback Deals Involving Listed Companies
- Sale And Leaseback-How To Determine whether it is A Finance Lease or Operating Lease And Accounting Treatment
- What is Sukuk-al-Ijara ( Sale and leaseback structure)
- Medium Term Financing- Hire Purchase and Leasing Facility (Part 1)
- Bridging & End-Financing
- Technical Summary Of IAS 17 Leases
April 18, 2006
Posted in: Financial Strategy, Sources of Financing
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