Sale-Leaseback Transaction: An Attractive Option in Today’s Market?
In today’s high interest rate environment, sale-leaseback transactions are becoming more and more common. In this type of transaction, the owner sells a property, then leases it back from the purchaser, which subsequently makes the seller the lessee and the purchaser the lessor.
Before we get into the advantages and disadvantages of this type of transaction, it is important to emphasize that buyers and sellers should carefully evaluate their financial, operational and tax goals, and negotiate a transaction or structure that best aligns with them. Now…onto the pros and cons.
In a sale-leaseback transaction, the buyer-lessor will:
- Often realize a higher rate of return than in a typical lending transaction. Theoretically, this is to compensate for the additional equity that is at risk.
- Benefit from the increase in the fair market value of the property, especially in times of rising real estate prices.
- Possess not just the title to the property, but also claim to the seller-lessee’s lease obligation.
In a sale-leaseback transaction, the seller-lessee will:
- Be able to present a more attractive sales offering to the market (than if the sales offering was for a vacant property).
- Have more leverage in lease negotiations than in a traditional leasing scenario.
- Convert a long-term non-liquid asset into working capital, thereby achieving a larger inflow of capital than from a typical lending scenario.
- Benefit from the full tax deductibility of the rental payments.
- Not suffer from potential disruptions to their business operations.
A primary concern in a sale-leaseback transaction is whether the transaction will be recognized as a sale or as a financing transaction. Since the previous owner will continue to occupy the property and will generally pay the operating costs, the transaction may be scrutinized. If the lease term is long or includes an option for the seller to repurchase the property, the transaction may be viewed more like a mortgage refinancing than a true property sale. If a sale-leaseback transaction is deemed a financing arrangement for tax purposes, it will be classified as a loan from the buyer to the seller, with a subsequent sale if the buyer-lessor ultimately retains ownership at the end of the lease term. As a result, the seller will be viewed as the property owner, and any taxable gain or loss from the seller-lessee’s supposed “sale” will not be recognized. Only the interest portion of the rental payments will be deductible by the seller-lessee, while the remaining portion will be treated as a payment of principal on the loan. Another significant issue to consider with a sale-leaseback transaction would be the impact of local transfer taxes and real property tax reassessments.
Sources: Bloomberg Tax, RIA Checkpoint, IRS.gov
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
Comments are closed.