Sale/Leaseback Benefits

Financial Advantages

  • A sale/leaseback essentially provides 100% financing to the business owner. A seller/lessee (tenant) looking to build does not have to tie up cash in the form of a down payment required by conventional banks. A seller/lessee who already owns the property can unlock the equity in the real estate and turn that equity into cash.
  • If properly structured as an “operating lease,” the lease does not add short- or long-term debt or the real estate asset to the balance sheet. Thus, certain financial ratios, such as the debt-to-equity-ratio, the current-ratio and the return-on-assets-ratio are actually improved. Because Generally Accepted Accounting Principles (GAAP) omits this transaction from the balance sheet, the borrowing capacity of the seller/lessee may be increased.
  Balance Sheet Before Sale/Leaseback Change Due to Sale/Leaseback* Balance Sheet After Sale/Leaseback
Cash 23,000 1,108,000 1,131,000
Other Current Assets 700,000 0 700,000
Non Current Assets 2,775,000 (2,229,000) 546,000
Current Liabilities **690,000 (80,000) 610,000
Non Current Liabilities 1,503,000 (1,503,000) 0
Stockholder’s Equity 1,305,000 ***462,000 1,767,000
     
Current Ratio 1.05   3.00
Debt to Equity 1.40   0.14

* Assumes Real Estate purchased 8 years ago for $2,700,0 00 was financed with $2.025,000 in debt @ 8.5% for 20 years. The real estate with net book value of $2,229,000 is now sold for $3,000,000.
** Assumes Accounts Payable, Current Portion of Long-Term Debt of $80,000 and working capital line of credit of $250,000.
***Assumes gain on sale of real estate of $770,000 is taxed at a rate of 40%.

Tax Advantages

  • By deducting lease payments, the lessee can write off the full cost of the real estate, including the portion that relates to land.
  • The tax deduction may be accelerated because it is spread over the term of the lease rather than 39 years, the term typically used for depreciating commercial buildings.

Sale/Leaseback – The Basics     Sale/Leaseback Benefits     Criteria

Custom Structoring     Financial Statement Impact

Mergers & Aquisitions     Next Steps

Case Studies:     Tire America     Kenco Group