As the economic slow-down continues and the credit crunch lingers on, businesses strapped for cash must consider alternatives to finance on-going operations. Businesses with real estate holdings may consider disposing of non-core real estate assets. However, when a company's real estate is a necessary asset to continued operations, a sale and leaseback of the company's real estate may be an appropriate way to monetize assets.

The Sale-Leaseback Transaction

A sale-and-leaseback transaction is an arrangement in which the owner of commercial real estate sells its real estate assets to another party, such as an institutional investor or a real estate investment trust (REIT), then immediately leases the real property back. As the result of the transaction, the original owner continues using and occupying the property but becomes tenant of the buyer, and has freed up significant capital.

Benefits of a Sale-Leaseback

The primary benefits of a sale-leaseback transaction to the owner of the property are that the transaction:

     ●  Generates cash that can be used in core operations or to pay down debt

     ●  Provides off-balance sheet financing

     ●  Reduces the negative impact of depreciation and interest on your income statement

     ●  Allows a business with historic tax losses to utilize a net operating loss carryforward

     ●  Creates a business expense deduction for the amount of the lease payments

Tax Issues

As a result of the sale-leaseback transactions, the seller-tenant would ordinarily be entitled to rental payment deductions as a business expense. The buyer-landlord would be entitled to an expense deduction for an investment in a depreciable property to allow for the recovery of the cost of the investment. If the IRS were to determine that the sale-leaseback were a disguised financing arrangement, the IRS would deny each party the respective business expense and depreciation deductions. Whether the IRS will respect the form of a transaction depends on the intent of the parties based on the facts and circumstances, and whether the benefits and burdens of ownership have actually passed to the buyer. To avoid recharacterization by the IRS, the parties must carefully document the lease terms, and the rental must reflect a true market lease and not a disguised financing transaction.

Contact Us

To speak to an attorney regarding the legal or tax issues related to a sale-leaseback transaction, please contact us here or call 713.650.9700.

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