Also known as a sale and leaseback, the leaseback is a business strategy that involves selling an asset to a buyer, then leasing that asset back from the lender for a specific period of time. The arrangement may continue for a number of years, and may eventually result in the repurchase of the leased asset. Along the way, there are several benefits the lessee enjoys, such as continued use of the asset without the need to pay property or other taxes associated with ownership. At the same time, the terms of the leaseback may mean that the seller loses certain rights and privileges associated with ownership, such as tax breaks or deductions.
One of the main benefits of the leaseback is that the arrangement can provide an influx of cash that a business may need for a specific purpose. By selling the asset, the funds from that sale can be directed toward the launch of a new product line, building a new facility, or some other project that is anticipated to benefit the business in some manner. Since the terms of the arrangement allow the seller to retain possession of the asset and use it in the course of business, the day to day operation remains the same, even as the cash from the sale makes it possible to pursue the new project.
There are a few additional benefits to the leaseback, in that the sold asset is no longer subject to taxes. This can have a beneficial impact on the tax burden carried by the seller, in that local and federal taxes may be reduced significantly. Those savings only add to the revenue that the company can use in other areas, increasing its chances for success.
Along with tax savings, the terms of the leaseback may also help to minimize maintenance costs. Assuming that the new owner takes on the responsibility for upkeep on the asset involved, this means that in the event of a breakdown, the owner not the user must cover the costs of repair. As with the tax breaks, this arrangement means even more money remains within the lessee’s company and can be used for whatever purposes the company owners choose.
While there are a number of benefits to a leaseback, there are also potential drawbacks to consider. The new owner may be unwilling to renew the lease after the initial contract expires, or even entertain the possibility of selling the asset back to the original owner. Even if the lessor is open to the idea of renewing the lease, he or she may choose to increase the amount of the installment payments in the renewed agreement. If the asset used as part of the leaseback is essential to the operation of the lessee’s business, then there may be no choice but to agree to the higher payments, a move that reduces the net profits for the operation.