What it means
Many businesses own valuable assets, such as head offices, warehouses, aircraft or machinery, that tie up a great deal of cash. In a leaseback, the owner sells the asset to an investor, such as a property fund, and signs a lease with the buyer at the same time.
The business keeps operating from the same premises or with the same equipment and gets the sale proceeds to spend elsewhere. The cash can be used to repay debt, fund expansion, buy back shares or simply strengthen working capital.
For a company with strong operations but a weak balance sheet, a leaseback can be quicker and cheaper than raising new equity. Buyers like leasebacks because they receive a predictable rental stream from a tenant with a known credit profile.
The key trade-off is that the seller swaps ownership for a rent obligation. The rent is a permanent cost that reduces future profit, and the business gives up any future increase in the asset's value.
If property prices rise strongly, the seller misses out, while if they fall, the seller is protected. Accounting and tax treatment need care.
Under modern lease accounting rules, the lease usually appears on the seller's balance sheet as a right-of-use asset and a lease liability, and any gain on the sale may be limited or deferred depending on whether the transfer counts as a genuine sale. Tax rules on gains and on the deductibility of rent vary by country, so advice is essential.
A related nuance is that a leaseback can be used to disguise borrowing. If the lease terms mean the seller effectively keeps the risks and rewards of ownership, accountants may treat the deal as a loan secured on the asset rather than a sale.
Lenders and analysts therefore adjust a company's debt for lease obligations when they compare businesses.
In practice
Real-world examples.
Example
A supermarket chain sells 20 of its stores to a property investor and leases them back on 20-year terms. It uses the proceeds to pay down borrowing. Its debt falls, but its rent expense rises.
Example
A regional airline sells three aircraft it owns to a leasing company and rents them back for ten years. The $90,000,000 of cash raised funds a fleet upgrade. The airline continues flying the same routes without interruption.
Example
A family-owned manufacturer sells its factory building to a pension fund and leases it back. The owners use the money to buy new machinery that raises output. They accept that they no longer benefit if the land becomes more valuable.
Formula
Calculation
Rent yield = annual rent / sale price x 100. Cash released = sale price - costs of sale - debt repaid on the asset
A retailer owns its distribution centre, which has a book value of $2,000,000. It sells the building for $3,000,000 and signs a 15-year lease at $240,000 a year. The rent yield is $240,000 / $3,000,000 x 100 = 8%. After $60,000 of sale costs, the cash released is $3,000,000 - $60,000 = $2,940,000. The retailer must now pay $240,000 each year, which over the 15 years is 15 x $240,000 = $3,600,000, more than the sale price, so the deal makes sense only if the cash earns a higher return in the business than the 8% rent.Case study
Seen in the real world.
Harbourview Foods is an illustrative, fictional business that owned its processing plant outright and needed $6,000,000 for a new production line. A bank would lend only $2,000,000 against its other assets, so the finance director explored a sale and leaseback of the plant.
An investor agreed to buy the plant for $8,000,000 and lease it back for 20 years at $560,000 a year, an initial yield of 7%. Harbourview used $6,000,000 for the production line and kept $2,000,000 as a cash reserve. The new line increased annual operating profit by an illustrative $1,200,000, well above the extra rent, and the lesson is that a leaseback works when the freed-up cash earns more than the rent costs.
Watch out
Common mistakes.
- Treating the sale proceeds as free money, when the business has taken on a long-term rent commitment that replaces the asset's ownership.
- Ignoring the loss of future price growth, which can be large for property in a rising market.
- Forgetting that lease liabilities are added to debt by lenders and analysts, so reported leverage may not fall as much as expected.
Questions
People also ask.
What is the difference between a leaseback and a normal lease?
In a normal lease the tenant never owned the asset, while in a leaseback the tenant sold it to the landlord at the start.
Why would a buyer want a leaseback?
The buyer gets a long-term tenant already in place, which means a predictable rental income from the first day.
Is a leaseback a loan?
Legally it is a sale and a lease, but economically it can resemble secured borrowing, and some accounting frameworks treat it as a financing when the seller keeps the risks and rewards of ownership.
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