Leasebacks

Leasebacks or “sale and leaseback” to give it its full title is a financial transaction, often used in the Commercial Real Estate market, where a company or individual sells an asset and then leases it backs for a long-term period. This allows one party to sell a property to a 3rd party (A Real Estate Investment Trust (REIT) or an institutional investor) in order to free up liquidity, whilst not having to relocate the business. This form of contractual agreement will often include a guaranteed buy-back scenario at a specified price and with various re-purchase horizon options, which could have an effect on the purchase amount.

The reasons and advantages for doing a “sale-and-leaseback” can be varied:

1. In order to finance the expansion of an existing business, to purchase new equipment, or to invest in new business opportunities.
2. To help pay down debt and improve the company's balance sheet.
3. To reduce the seller/lessee's tax liabilities; this can be caused by the appreciation in value - land only - of its corporate real estate assets.
4. The seller/lessee as a tenant can deduct all rent payments as a legitimate business expense on its annual tax returns.

Other forms of leasebacks are based on similar models and used as crossover vehicles for clients that wish to invest in and also utilise a property. This method has become very popular in France – French Leaseback – USA and Australia. It is also becoming popular in other areas of Europe and the UK.

A “second home” leaseback will typically account for a yield of around 5% per annum net and allows owners to use the property for a pre=determined amount of weeks each year (normally 1-2 weeks).

The lease contracts tend to run for between 5-15 years, during which time you only have minimal interaction and use of the property. The resale market for leasebacks is temperamental, and liquidating a property investment can take months. Cancelling a leaseback, particularly in France can be cost prohibitive and realistically investors should only invest in leasebacks if they are certain that they can hold the property for the full term.  Transaction costs tend to be high and often have negative effects on the advertised yield.