Sale Leasback is an arrangement whereby the owner/occupant of a property sells his/hers interest and then leases the same property with the intention of liquefying equity.

While sale-leaseback transactions may be structured in a variety of ways, a basic sale-leaseback can benefit both the seller/lessee and the buyer/lessor. However, all parties must consider the business and tax advantages, disadvantages, and risks involved in this type of arrangement before moving forward.

In the typical sale-leaseback, a property owner sells real estate used in its business to an unrelated private investor or to an institutional investor. Simultaneously with the sale, the property is leased back to the seller for a mutually agreed-upon time period, usually 20 to 30 years.

The sale-leaseback may include either or both the land and the improvements. Lease payments typically are fixed to provide for amortization of the purchase price over the term of the lease plus a specified return rate on the buyer's investment.

The typical transaction usually is an absolute-net-lease arrangement. Sale-leasebacks often include an option for the seller to renew its lease, and on occasion, repurchase the property.

Lease Financing
The control and use of an asset is all that is necessary for many users of real estate. Most users acquire control and use through the method of purchase with borrowing. Expansion of many limited because of the lack of necessary capital to acquire o assets needed to expand. Lease financing is one alternative so capital shortage problem.

Leasing vs. Owning
Many businesses, when comparing the alternatives of leasing vs. owning view the leasing alternative in terms of their cost of capital. This is illustrated in the following example:

Acquisition Cost of Real Estate $100,000
Annual Rent $12,000

Their analysis would be that their cost of capital ($100,000) would be 12 percent. If they could borrow capital at anything less than 12 percent, they would be better off borrowing and purchasing than leasing.

Let's assume the asset they are considering purchasing or leasing has a 15-year life. If the asset is actually declining in value and will have a zero value at EOY 15, their cost of capital has been approximately 8.4 percent. That is, the present value of a $12,000 level annuity for 15 years is $100,000 when discounted at 8.44 percent; thus, the I RR of approximately 8.4 percent.

The opportunity cost of money that a business has must be considered in making the decision to buy or lease. Opportunity cost in this instance refers to the "cost" of not investing capital in the operations of the business firm; that is the rate that could be earned if invested in the business rather than in the real estate used in the business.

Regardless of the cost of capital, if the opportunity exists to invest capital in excess of that which the business is capable (or desirous) of borrowing, the leasing alternative is preferable if the opportunity cost of money is grater than the cost of capital.

The process to determine which alternative is most advantages first requires reducing both alternatives to annual cash flows.

Both alternatives represent outlays of cash before and after taxes at different periods of time. To compare and evaluate the two obligations, we need to compare them at the same point in time.

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