Leaseback - Commercial Real Estate

Commercial Real Estate

A sale-and-leaseback is typically a commercial real estate transaction in which one party, often a corporation, sells its corporate real estate assets to another party, such as an institutional investor, or a real estate investment trust (REIT), and then leases the property back at a rental rate and lease term that is acceptable to the new investor/landlord. The lease term and rental rate are based on the new investor/landlord's financing costs, the lessee's credit rating, and a market rate of return, based on the initial cash investment by the new investor/landlord.

The reasons and advantages for a seller/lessee are varied, but the most common are:

• Help finance expansion of the existing business, purchase new plant equipment, or invest in new business opportunities.
• Help pay down debt and improve the company's balance sheet.
• Help reduce the seller/lessee's business income tax liability caused by the appreciation in value (land only) of its corporate real estate assets. In addition, the seller/lessee as a tenant can deduct all rent payments as a legitimate business expense on its annual tax returns.

The advantages for an investor/landlord are:

• Fair return on the investment in the form of rent during the lease term, and ownership of a depreciable asset already occupied by a reliable tenant.
• Long-term, fully leased asset with a guaranteed income stream.
• For income-tax purposes, the investor/landlord can take an expense deduction for an investment in a depreciable property to allow for the recovery of the cost of the investment.