Leaseback (Sale‑Leaseback)

What is a leaseback?

A leaseback, or sale‑leaseback, is a financial arrangement where an owner sells an asset and simultaneously leases it back from the buyer. The seller becomes the lessee and retains operational use of the asset while converting its ownership into cash. Typical assets include buildings, land, aircraft, and large equipment.

How it works

• The owner sells an asset to a buyer at an agreed market price.
• The buyer (lessor) leases the same asset back to the seller (lessee) under a long‑term lease.
• The lessee continues using the asset with no interruption, and the buyer receives lease payments and a return on investment.

Why companies use leasebacks

• Liquidity: Unlocks cash tied up in fixed assets without issuing debt or equity.
• Balance‑sheet flexibility: Converts a physical asset into cash; depending on accounting standards and lease structure, it can reduce reported liabilities compared with taking on conventional debt.
• Operational continuity: Keeps access to essential assets needed for business operations.
• Capital reallocation: Frees capital for expansion, debt reduction, working capital, or strategic investments.
• Risk management: Transfers ownership risks (e.g., obsolescence, disposal) to the buyer in some structures.

Common users and industries

Leasebacks are popular where high‑cost, fixed assets are essential:
* Real estate and property owners
* Retail chains (store buildings)
* Transportation firms (airlines, shipping)
* Construction and heavy‑equipment operators
* Healthcare providers (medical equipment)

Illustrative example

A bank sells its safe deposit vaults to a leasing company at market value and immediately leases them back under a long lease. The bank receives cash proceeds to use elsewhere while continuing to rent the vault space it needs for customer services. The lessor earns steady lease income and expects a return on its investment.

Benefits to the seller (lessee)

• Immediate cash inflow without issuing new debt or equity.
• Potential tax advantages: lease payments are often deductible; sale may produce taxable gain — treatment depends on jurisdiction.
• Improved liquidity and flexibility to redeploy capital.
• Possible improvement in some financial ratios (depending on accounting treatment).
• Reduced exposure to asset‑ownership risks and maintenance responsibilities (if contractually shifted).

Benefits to the buyer (lessor)

• Predictable, contractual lease income over the lease term.
• Ownership of an asset that can appreciate or be sold at lease end.
• Potential for a favorable return on investment if purchase price and lease rate are well structured.
• Security of long‑term tenant/lessee relationship when leases are guaranteed.

Accounting and tax considerations

• Accounting: Modern lease accounting standards (e.g., ASC 842, IFRS 16) may require recognition of right‑of‑use assets and lease liabilities on the lessee’s balance sheet, affecting reported leverage and EBITDA differently depending on lease classification.
• Tax: Sale proceeds can trigger taxable gains; lease payments may be deductible. The classification of the transaction for tax purposes (true sale vs. secured financing) must be carefully documented.
• Structuring matters: Whether the arrangement qualifies as a true sale or is treated as financing affects both accounting and tax treatment.

Risks and pitfalls

• Sale price vs. market/book value: Selling below fair value sacrifices equity; selling above book value can create taxable gains.
• Lease terms: Long, inflexible leases can lock a company into unfavorable payments if circumstances change.
• Loss of asset appreciation: The seller gives up future upside if the asset appreciates.
• Counterparty risk: Buyer’s financial weakness could complicate arrangements (e.g., subleasing, asset maintenance).
• Regulatory or tax recharacterization: Authorities may reclassify the deal as financing, reversing intended benefits.

When to consider a leaseback

• When you need cash but must continue using the asset.
• When you want to avoid adding traditional debt or diluting equity.
• When the asset is non‑core to long‑term strategy but necessary for current operations.
• After weighing tax, accounting, and strategic implications with legal and tax advisors.

Key takeaways

• A sale‑leaseback converts owned assets into cash while preserving use through a lease.
• It provides liquidity and operational continuity without direct new debt or equity issuance, but accounting rules and tax laws determine the actual impact.
• Both buyers and sellers can benefit, but careful structuring and professional advice are essential to manage risks and ensure intended treatment.

Consult your accountant and legal counsel before entering a sale‑leaseback to ensure proper documentation and to evaluate tax, accounting, and strategic consequences.