What Is a Sale-Leaseback Transaction?

What is a sale-leaseback transaction?

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.

How does a sale-leaseback transaction work?

A real estate leaseback transaction consists of two related agreements:

• The property's current owner-occupier agrees to sell the asset to an investor for a fixed price.
• The new owner agrees to lease the property back to the existing occupant under a long-term leaseback agreement, thereby becoming a landlord.

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.

Why would you do a sale-leaseback?

A sale-leaseback transaction benefits both the seller and the purchaser of a property. Benefits to the seller/lessee include:

• The ability to free up balance sheet capital invested in a real estate asset to finance business expansion, reduce debt, or return cash to investors.
• The ability to continue occupying the property.
• A long-term lease agreement that locks in expenses.
• The ability to deduct rent payments as a business expense.

Likewise, the purchaser/lessor also experiences several benefits from a leaseback transaction, including:

• Ownership of a cash-flowing asset, backed by a long-term lease.
• Ownership of a property with a long-term lease to a tenant that needs it to support its operations.
• The ability to deduct depreciation expenses on the property on their income taxes.