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Sale-Leaseback: Definition, Advantages & Disadvantages Video

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  • 0:03 Leaseback Defined
  • 1:05 Advantages
  • 1:49 Disadvantages
  • 2:35 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Businesses that are strapped for cash sometimes turn to a sale and leaseback transaction. In this lesson, you'll learn what a sale and leaseback is and its advantages and disadvantages.

Leaseback Defined

Adam owns a company that manufactures car parts. He has a dilemma. He needs to upgrade his facilities to stay competitive, but his lender wants him to commit more money to the upgrade before it will lend him money. He doesn't want to bring in money by taking on business partners, so Norm, his accountant, suggests a sale and leaseback as a possible solution.

A sale and leaseback, also known as a leaseback or sale-leaseback, is a transaction where the owner of an asset sells it to someone else and then immediately leases the property he sold back from the buyer. Let's look at how Adam can use a leaseback to solve his problem.

In our example, Adam's company owns about ten acres of prime industrial property on the outskirts of town. He's currently using about five acres, and his expansion will take up another three. Adam's not in the real estate business and really doesn't need to own the land his factory is sitting on. Consequently, he can sell the ten acres to real estate investors and lease the property he needs back from the investor.

Advantages

A leaseback can provide some distinct advantages. The sale gives Adam the infusion of cash he needs to expand his business. He sells an asset he really doesn't need to own - the ten acres of land - but he can still continue to use it by leasing it.

Also, since Adam owns the property that he'll be selling and then leasing back, he might be in a good bargaining position to get the lease terms he wants. This is because he can not only offer the buyer prime real estate but also a long-term tenant with long-term steady rental income that real estate investors desire. Finally, businesses in Adam's position usually are able to deduct the lease payments from their taxes as an ordinary and necessary business expense.

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