In addition, the buyer's investment in the leased property may be less liquid or marketable than a loan. Finally, the cost of negotiating may be higher, because substantial time and effort may be required to tailor the transaction to the seller's needs. Tax Considerations A seller's decision to raise funds through a sale-leaseback frequently is based on substantial income-tax advantages. These savings are an additional source of cash that the seller may use.
Deduction of Rental Payments. The main tax advantage of a valid sale-leaseback is that rental payments under the lease are fully deductible. With conventional mortgage financing, a borrower deducts interest and depreciation only. The rental deduction may exceed the depreciation in three cases: if the property consists primarily of a nondepreciable asset, such as land although land is not depreciable, rental payments for the lease of land may be deducted ; if the property has appreciated in value while depreciation deductions are limited by the cost of the property, rental deductions may equal the fair market value of the property ; or if the property has been fully depreciated.
Timing Gain and Loss Recognition. A seller can use a sale-leaseback to time the recognition of gains or losses while retaining the use of a property. A business may want to recognize gains to use business credits or net operating loss carryovers. If the business owns appreciated property, a sale of assets will produce a gain that could be offset by the credits or net operating loss carryovers.
However, if the adjusted basis of the assets exceeds its fair market value, a recognized loss will reduce tax liability. Capital Gain-Ordinary Loss Treatment. Because the property involved in a sale-leaseback generally is held for use in the seller's trade or business, it qualifies for capital gain-ordinary loss treatment. Under Section of the Internal Revenue Code, if the property is held for the long-term holding period, gain on the sale, with some exceptions, will be taxable as long-term capital gain to the extent that the gain exceeds the losses in the same year from the sale of other Section property.
However, the gain will be taxable as ordinary income to the extent of recapture income. But in the case that the sale results in a loss, it will be deductible in full as an ordinary loss to the extent the loss exceeds Section gains from the sale of other property in the same year.
This can be a substantial advantage to the seller in a sale-leaseback transaction. On the other hand, improper structuring of sale-leaseback transactions may result in adverse tax consequences to the seller. If the sale-leaseback transaction gives the seller an option to repurchase the property or if the seller retains substantial ownership rights, the Internal Revenue Service may view the transaction as a mortgage.
In that case, the seller would not be allowed a deduction for rent but could deduct depreciation and a portion of the rent payments as interest.
Loss May Not Be Recognized. If the lease term is for 30 years or more, any ordinary loss deduction that otherwise would be allowable on a sale-leaseback transaction might be barred on the theory that it is a nontaxable exchange of like-kind property under IRC Section However, the seller would be entitled to depreciation on its basis for the leasehold over the lease term. Deductions May Be Recaptured. The effect of any recapture on the sale-leaseback transaction must be taken into account, since the sale of the property under a sale-leaseback may trigger depreciation, investment tax credit, and other types of recapture.
Buyer Advantages The viability of a sale-leaseback often depends on the potential effects of the transaction on the buyer.
A properly structured sale-leaseback transaction provides the buyer with a number of advantages and benefits. Higher Return Rate. The buyer usually receives a higher rate of return in a sale-leaseback than in a conventional loan arrangement. Also, the buyer may be able to circumvent state usury laws that limit the rate of interest charged with conventional financing.
In addition, at the end of the lease term, the buyer receives the benefit of any appreciation in the value of the property.
Finally, the buyer can leverage the purchase with mortgage financing; this may further magnify the return rate on the cash invested. Predictable and Secure Return Rate.
The long-term net lease enables the buyer to estimate accurately the expected future rate of return. Also, the extended term of the lease provides the buyer with protection from downturns in the real estate market and an inflation hedge, assuming that the property value appreciates over time. Greater Ease in Handling a Seller Default. In the event that the seller defaults under the lease, the buyer can simply terminate the lease and have the seller evicted.
The risk here is that the buyer may have trouble finding another tenant after the eviction process is completed. Avoids Usury Problems. In a sale-leaseback arrangement, the buyer can avoid the state usury problems encountered by lenders when money is tight. The buyer and the seller can establish any mutually agreed upon rent level. Ownership of the Reversion. The buyer owns the reversionary interest in the property. If the seller has an option to purchase or an option to renew the lease, this may limit or postpone the time that the buyer actually realizes the profit potential.
The buyer also bears the risk that the property value actually might decline over the lease term. So, in a typical sale-leaseback, your company would receive a lump sum of cash at the closing and then pay it back in monthly installments over time. How much cash you receive for the sale of the equipment depends on the equipment, the financial strength of your business, and your financing partner.
Most often, businesses that use sale-leasebacks are companies that have high-cost fixed assets, like property or large and expensive pieces of equipment. However, sale-leasebacks are also used by companies in all sorts of other industries, including construction, transportation, manufacturing, and agriculture.
Large trucks, valuable pieces of heavy machinery, and titled rolling stock can all work. Or, if your sale-leaseback is structured as a sale and an operating lease, it could look very different from a loan. Since these are very different products, trying to compare them is like comparing apples and oranges.
With a sale-leaseback, your company may qualify for Section benefits and bonus depreciation, among other potential benefits and deductions. Often, your financing partner will be able to make your sale-leaseback very tax-friendly. Depending on how your sale-leaseback is structured, you may be able to write off all the payments on your taxes. If you own valuable equipment, then you may be able to qualify for a sale-leaseback even if your business has unfavorable items on its credit report or is a startup business with little to no credit history.
You should be able to work with your financing partner to get payment amounts, financing rates, and lease terms that comfortably meet your needs. You do need to meet two primary conditions to qualify for a sale-leaseback. Those conditions are:. If your sale-leaseback is an operating lease where you gave up ownership of the asset, these are the typical end of term options:.
If your sale-leaseback was structured as a capital lease, you may own the equipment free and clear at the end of the lease term, with no further obligations.
Already a member? Sign in here. Access to timely real estate stock ideas and Top Ten recommendations. Learn More. A sale-leaseback transaction can potentially benefit both the buyer and seller of real estate. Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide. A sale-leaseback transaction allows owners of real property, like real estate, to free up the balance sheet capital they've invested in an asset without losing the ability to continue using it.
The seller can then use that capital for other things while the purchaser owns an immediately cash-flowing asset. A sale-and-leaseback, also known as a sale-leaseback or simply a leaseback, is a financial transaction where an owner of an asset sells it and then leases it back from the new owner. In real estate, a leaseback allows the owner-occupant of a property to sell it to an investor- landlord while continuing to occupy the property. The seller then becomes a lessee of the property while the purchaser becomes the lessor.
This transaction allows a seller to remain an occupant of a property while transferring ownership of an asset to an investor. The purchaser, meanwhile, is buying a property with a long-term tenant already in place, so that they can start generating cash flow immediately. A sale-leaseback transaction benefits both the seller and the purchaser of a property.
One of the most common types of sale-leaseback transactions is between commercial property owner-occupants and real estate investors like real estate investment trusts REITs. In these transactions, the owner-occupant sells its property to the REIT, which leases it back to the seller. These deals allow the seller to free up the balance sheet capital they had tied up in real estate assets to reinvest in growing their business, repay debt, or return cash to investors.
The REIT, meanwhile, adds another property to their portfolio of cash-flowing real estate assets, helping them to diversify while growing their income stream to support a higher dividend.
Another, though less common, sale-leaseback transaction involves residential homes.
0コメント