A growing form of real estate transaction, particularly favorable to Corporate Ventures, because of tax benefits and the release of capital, is the sale/leaseback arrangement.
Retail buildings and stores; corporate offices and headquarters buildings; research and development facilities; industrial warehouses and manufacturing plants.
For a company desiring to convert illiquid assets into working capital, sale/leaseback arrangements are particularly attractive.
Overall, the benefits of leaseback financing to a property owner are manifold:
- It generates 100% "financing" of business real estate assets.
- There are no restrictions on the use of funds provided by sale/leaseback financing. They may be used for expansion, debt consolidation or reduction, operating capital, or for investment purposes.
- Credit lines with banks, insurance companies or other lenders are generally not disturbed - because negative covenants in borrowing agreements do not usually prevent the debtor from selling and leasing back real estate.
- The net proceeds from the sale of the real estate will appear as an asset on the balance sheet as additional cash (minus provisions for income taxes as a result of any gain on the sale). The net worth of the company is increased on the balance sheet because, in most cases, the equity in real estate realized by a company in a sale/leaseback is greater than the net book value of the property.
- If the transaction is properly structured, the total rent is a deductible item for income tax purposes. This has the effect of deduction non-depreciable land, since the rent includes the right to use the land.
- The seller is assured of the right to occupy the property on a long-term basis on terms, which he has negotiated for his benefit. The seller has the use of the property as though he owned it, without having capital invested in it.
- If the transaction is properly structured, capital improvements built by the lessee may be amortized over the period of the lease. Many times this results in an amortization schedule, which is faster than what would be available by depreciation if the lessee owned the property.
