Leaseback
Leaseback, short for "sale-and-leaseback", is a
Leaseback arrangements
After purchasing an asset, the owner enters a long-term agreement by which the property is leased back to the seller at an agreed rate. One reason for a leaseback is to transfer ownership to a
Possible solution to toxic banking assets
According to Robert Peston, one-time Business Editor for the BBC, one option being considered for dealing with the subprime mortgage crisis is a sale-and-leaseback of toxic assets. Peston says "a sale-and-leaseback between the banks and the state has two supreme advantages: there's no need to value the poisonous assets; and losses on those stinky assets would be absorbed by the banks in manageable chunks over about 10 years."[2]
Real estate
Leaseback arrangements are popular in France, the United States, United Kingdom, and throughout Australia and Asia, including, more recently, in India.
France
Leaseback of residential property has been popular in
The scheme works by purchasing a freehold property. You become the legal owner. The property is then leased back to the developer or a management company. Under the leaseback scheme the government also refunds to you the VAT normally charged on a new build properties (currently 19.6%).
The owner is then guaranteed a rental income throughout the period of the lease. The net return to the owner varies between developments but is typically between 4% and 6%. This compares very favourably with a typical 20 year fixed rate mortgage of around 3.75%, and variable rate mortgages which are lower. It can be seen how the rental income can be used in respect of the mortgage payments. Loans of between 75% and 85% are available depending upon circumstances. The rental yield is also index linked annually to construction costs, which means the rental income currently increases by approximately 2.5%.
As in the UK there are tax allowances in respect of mortgage payments which can be offset against income. The lease typically lasts for between 9 and 11 years, after which the management company has the option to either renew, or the property can be sold, or rented out and held privately by the owner.
The purchaser/owner can also enjoy periods of usage free of charge through the year, depending upon the terms of the lease. These terms normally allows for between 4 and 6 weeks free usage each year. The management company is responsible for the maintenance of the property including the maintenance of furnishings which are often included in the purchase price. The developer is also responsible for insuring the building and its contents. It also pays for some of the property taxes and all the utility costs.
United Kingdom
In the United Kingdom, a form of leaseback known as sale and rent back was the subject of a 2014 Supreme Court case that found many such arrangements had been perpetrated fraudulently.[3]
United States
A "sale/leaseback" or "sale and leaseback" is a transaction in which the owner of a property sells an
Other countries
The leaseback concept has spread to other European countries, including
Commercial real estate
A sale-and-leaseback is typically a commercial
The reasons and advantages for a
- Help investin new business opportunities. A sale leaseback enables a corporation to access more capital than traditional financing methods. When the real estate is sold to an outside investor, the corporation receives 100% of the value of the property. Traditional financing is limited to a loan-to-value ratio or debt-coverage-ratio.
- Help pay down debt and improve the company's balance sheet.
- Help reduce the seller/lessee's business income tax on its annual tax returns.
- Helps limit risks associated with owning real estate such as cyclical market variations.[8]
The advantages for an investor/landlord are:
- Fair return on the investment in the form of rent during the lease term, and ownership of a depreciable asset already occupied by a reliable tenant.
- Long-term, fully leased asset with a guaranteed income stream.
- For income-tax purposes, the investor/landlord can take an expense deduction for an investment in a depreciable property to allow for the recovery of the cost of the investment.
- Ability to invest in real estate with a tenant who is already familiar with the property.[citation needed]
Aviation
Leaseback is also commonly used in
Leaseback is very often used in commercial aviation to essentially take back the cash invested in assets.
Industrial equipment
The leaseback concept has also spread to
See also
References
- ^ Arie, Sophie. "Another campaign for the Falklands".
- ^ "Peston's Picks: First Septic Bank (revisited)". BBC. Retrieved 2013-07-03.
- ^ Jones, Rupert (7 November 2014). "Sick and elderly face pre-Christmas eviction as court backs lenders". The Guardian. London. Retrieved 9 November 2014.
- ^ "Leaseback". Investopedia.com. 2013-06-28. Retrieved 2013-07-03.
- ^ "Net Lease Insider: Search results for leaseback".
- ^ Sichelman, Lew (October 15, 2010). "Sale-Leaseback". Retrieved 2011-11-07.
- ^ "Hipp, Jonathan W. "Technical Advice Memorandum No. 2003-46007 - Calkain Companies, Inc." CALKAIN COMPANIES, INC. - Your Source for Investment Real Estate. Web. 20 July 2010". Calkain.com. Retrieved 2013-07-03.
- ^ Sale Leaseback, CookCRE | Sale Leaseback Advisory