Lease-back

3 key takeaways

• Lease-back transactions enable property owners to access capital while retaining the use of the asset through a lease agreement.
• This arrangement is commonly used in commercial real estate to improve liquidity and balance sheet flexibility.
• Lease-back deals can offer tax benefits and off-balance-sheet financing for the seller, while providing a stable income stream for the buyer.

What is a lease-back?

A lease-back, or sale-leaseback, is a financial arrangement where a property owner sells an asset to a buyer and simultaneously enters into a lease agreement to rent the asset from the new owner. This transaction allows the seller to free up capital while continuing to use the asset for a specified period, typically under long-term lease terms.

Example

A company that owns its office building may choose to sell the property to a real estate investor and then lease it back from the investor. The company receives a lump sum from the sale, which can be used for other business needs, while continuing to operate from the same location under a lease agreement.

Benefits of lease-back transactions

Improved liquidity

Lease-back arrangements enable companies to convert illiquid assets into cash without disrupting their operations. The capital released from the sale can be used for various purposes, such as paying down debt, investing in growth opportunities, or improving working capital.

Balance sheet management

By selling an asset and leasing it back, companies can remove the asset from their balance sheet, which may improve financial ratios and make the balance sheet appear stronger. This can be particularly beneficial for businesses seeking to enhance their financial position and attract investors.

Tax advantages

Lease payments made under a lease-back agreement are often tax-deductible as a business expense. This can provide a significant tax benefit to the seller-lessee, reducing their overall tax liability.

Off-balance-sheet financing

Lease-back transactions can be structured to keep the lease obligation off the balance sheet, depending on the accounting standards and lease terms. This off-balance-sheet financing can help companies manage debt levels and maintain favorable credit ratings.

Considerations for lease-back transactions

Long-term lease commitments

While lease-back arrangements provide immediate liquidity, they also involve long-term lease commitments. The seller-lessee must carefully consider the lease terms, including rental rates, lease duration, and potential rent escalations, to ensure that the arrangement remains financially viable.

Loss of asset ownership

By selling the asset, the original owner relinquishes ownership and any potential future appreciation in the property’s value. This can be a significant consideration if the asset is expected to appreciate substantially over time.

Impact on control

In a lease-back arrangement, the seller becomes a tenant and may lose some control over the property. It is essential to negotiate lease terms that protect the seller’s interests and ensure continued access and use of the asset without undue restrictions.

Applications of lease-back transactions

Commercial real estate

Lease-back transactions are common in commercial real estate, where companies seek to monetize valuable properties while maintaining operational continuity. Businesses such as retail stores, office buildings, and industrial facilities often use lease-back arrangements to unlock capital.

Corporate finance

In corporate finance, lease-back deals are used to improve liquidity and strengthen the balance sheet. Companies can use the proceeds from the sale to invest in core business activities, reduce debt, or fund expansion plans.

Public sector

Governments and public sector entities also use lease-back arrangements to raise funds for infrastructure projects and other public needs while retaining the use of essential properties.

Related topics

• Real estate investment trusts (REITs): Learn about investment vehicles that own and operate income-generating real estate, including properties involved in lease-back transactions.
• Corporate finance: Explore the broader field of corporate finance, including strategies for managing assets, liabilities, and capital structure.
• Operating leases vs. capital leases: Understand the differences between operating leases and capital leases, including their accounting and financial implications.

Lease-back transactions provide a strategic way for property owners to access capital while continuing to use their assets. By understanding the benefits and considerations of lease-back arrangements, businesses and investors can make informed decisions that enhance financial flexibility and support long-term objectives.