Leasing 101 - What is a leaseback?

From WiseGeek.com

"A leaseback is very simple really. Sometimes known as a sale/leaseback or sale and leaseback, it is a transaction wherein the owner of a property sells that property and then leases it back from the buyer. The purpose of the leaseback is to free up the original owner's capital while allowing the owner to retain possession and use of the property. The type of property involved can be anything from residential or commercial real estate to equipment or vehicles.

"A leaseback can be beneficial for the buyer and seller alike. The seller attains a lump sum of cash quickly and the buyer acquires a lower than market value purchase price, along with a long-term lease at a premium rate. The lease amount provides periodic income and may even be enough to pay the buyer's mortgage, if he or she borrowed money to obtain the property. A leaseback can be a great investment tool, one that yields a high return. As with any investment, however, there are associated risks.

"Some leaseback arrangements allow the seller, or current lessee, the option to buy back the property at a future date. During the life of the leaseback, however, the buyer derives tax benefits from the arrangement, such as being credited for depreciation of the property. If the seller exercises the option of buying the property back, all rights will revert to the seller upon closing the transaction, so setting the sale for the end of the tax year is a convenient way to keep things straight for the Internal Revenue Service. This is important, because if either party is audited during the leaseback, both can experience problems that range from minor inconveniences to very costly dilemmas.

"If the seller files bankruptcy or is audited, and the IRS or bankruptcy court believes that the seller arranged the leaseback to hide assets, the transaction can be reclassified. Ownership of the property will be credited to the original owner, and the property may be confiscated in order to resolve tax liens or arrears to other creditors. In this case, the buyer could lose a great deal of money, so caution is advised when considering a leaseback agreement."

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I hope this answers a few basic questions about what a leaseback is and why it would be executed. These type of transactions are very common in the industry and can act as a beneficial hedge when a businesses cash flow fluctuates or during times of an economic downturn.