10.1 Introduction and Overview
A sale-and-leaseback transaction is a common and important financing method for
many companies; these transactions involve the transfer of an asset by an owner
(“seller-lessee”) to an acquirer (“buyer-lessor”) and a transfer of the right to
control the use of that same asset back to the original owner for a period.
Sale-and-leaseback transactions offer seller-lessees a number of advantages, including:
- The ability to free up the cash invested in the asset and invest that cash in more profitable or more pressing projects (e.g., paying off corporate debt, reinvesting the cash into operations, funding stock buybacks). This may be particularly advantageous in tight credit markets.
- In a sale-and-leaseback arrangement, essentially 100 percent of the asset is financed. This may be a higher level of financing than the seller-lessee ordinarily would be able to obtain.
- Under the legacy sale-and-leaseback accounting requirements in ASC 840, a seller-lessee may have been allowed to remove the asset and any related debt from its balance sheet; as a result, the seller-lessee’s financial ratios may improve. However, the lessee accounting model in ASC 842 (see Chapter 8) removes the off-balance-sheet benefits of sale-and-leaseback transaction structures for seller-lessees. That is, while the underlying asset and corresponding debt may be removed, they are replaced with the ROU asset and lease liability, albeit typically at a lower value.
- The transaction also may improve the seller-lessee’s income statement. Depreciation expense and interest expense could be reduced, and the cash freed up by the transaction could be invested to obtain a greater return than could be obtained when the cash was invested in the asset. In addition, the seller-lessee may have lower income tax expense, since tax deductions arising from the rental payments could exceed the deductions that had been generated by debt payments. These favorable income statement effects may be offset to some extent by the additional rental expense that will be recognized and reduced tax deductions for depreciation expense.
- The transaction allows the seller-lessee to refocus its resources on its primary business operations instead of managing and maintaining fixed assets or real estate.
The buyer-lessor in a sale-and-leaseback transaction benefits from receiving a steady return on its investment in the form of annual rental payments and may receive certain tax advantages. Furthermore, the buyer-lessor will receive benefits through owning the asset, including any future asset appreciation.