What Is a Leaseback?

What Is a Leaseback?

Let me explain what a leaseback is. It's a financial setup where you sell an asset and then lease it back from the buyer. This way, as the seller who turns into the lessee, you free up the capital stuck in assets like buildings, land, or heavy equipment, all while keeping them in use just like before.

You'll see companies in fields with pricey fixed assets, think real estate, aerospace, and construction, turning to this to get cash without piling on debt. It's not like regular loans; it's a mix that boosts your balance sheet by turning assets into cash and lets you keep running your operations smoothly.

Key Takeaways

Here's what you need to know directly: A sale-leaseback lets you sell an asset to get capital and then lease it back so you can still use it. Industries like real estate and transportation use this often to grab quick liquidity without debt. It can strengthen your balance sheet by adding cash and cutting liabilities more than debt financing does. Unlike debt, it gives you flexibility without upping your debt load, which is great if you need those assets to operate. These deals can work well for both sides, but watch out for tax and business effects.

How Leasebacks Operate in Business

In these agreements, you sell an asset you own to someone else and then lease it back for a long time. This means you, as the business owner, keep using that key asset without actually owning it anymore.

Think of it like a business take on a pawnshop deal. You bring your valuable asset to the 'pawnshop,' trade it for cash, but unlike pawning, you don't plan to buy it back. A sale-leaseback lets you sell to raise money, then lease it from the buyer, so you end up with the cash and the asset for your operations.

Industries and Motivations Behind Leaseback Use

The biggest users are builders or firms with expensive fixed assets, such as property, land, or big equipment. That's why you find leasebacks in building, transportation, real estate, and aerospace sectors.

You'd use a leaseback when you want the cash tied up in an asset for something else, but you still need the asset to run your business. It's a solid option for raising funds. Normally, to get cash, you'd borrow (adding debt) or issue stock (equity financing). A loan has to be repaid and sits as debt on your balance sheet. But a leaseback can actually make your balance sheet look better—liabilities drop since there's no debt, and current assets rise with the cash and lease setup. Equity doesn't need repaying, but shareholders claim earnings. A sale-leaseback isn't debt or equity; it's like a hybrid that gives you capital from selling assets without increasing debt.

Real-World Leaseback Scenario

You'll find plenty of examples in corporate finance, but take the safe deposit vaults at banks. Banks start by owning the vaults in their basements. They sell them to a leasing company at market price, which is way above book value. Then, the leasing company rents them back to the banks long-term. The banks sub-lease them to customers like you.

More Benefits of Leasebacks

These transactions can be set up in different ways to help both the seller/lessee and buyer/lessor. But everyone involved has to think about business and tax implications, plus any risks.