Sale/Leaseback Benefits
Financial Advantages
- A sale/leaseback essentially provides 100% financing
to the business owner. A seller/lessee (tenant) looking
to build does not have to tie up cash in the form
of a down payment required by conventional banks.
A seller/lessee who already owns the property can
unlock the equity in the real estate and turn that
equity into cash.
- If properly structured as an “operating lease,”
the lease does not add short- or long-term debt or
the real estate asset to the balance sheet. Thus,
certain financial ratios, such as the debt-to-equity-ratio,
the current-ratio and the return-on-assets-ratio are
actually improved. Because Generally Accepted Accounting
Principles (GAAP) omits this transaction from the
balance sheet, the borrowing capacity of the seller/lessee
may be increased.
| |
Balance
Sheet Before Sale/Leaseback |
Change
Due to Sale/Leaseback* |
Balance
Sheet After Sale/Leaseback |
| Cash |
23,000
|
1,108,000
|
1,131,000
|
| Other
Current Assets |
700,000
|
0 |
700,000
|
| Non
Current Assets |
2,775,000 |
(2,229,000) |
546,000
|
| Current
Liabilities |
**690,000
|
(80,000) |
610,000
|
| Non
Current Liabilities |
1,503,000
|
(1,503,000) |
0
|
| Stockholder's
Equity |
1,305,000
|
***462,000
|
1,767,000
|
| |
|
|
| Current
Ratio |
1.05 |
|
3.00 |
| Debt
to Equity |
1.40 |
|
0.14 |
|
* Assumes Real Estate purchased 8 years
ago for $2,700,0
00 was financed with $2.025,000 in debt
@ 8.5% for 20 years. The real estate with net book value
of $2,229,000 is now sold for $3,000,000.
** Assumes Accounts Payable, Current Portion of Long-Term
Debt of $80,000 and working capital line of credit of
$250,000.
***Assumes gain on sale of real estate of $770,000 is
taxed at a rate of 40%.
Tax Advantages
-
By deducting lease payments, the lessee can write off
the full cost of the real estate, including the portion
that relates to land.
- The tax deduction may be accelerated because it
is spread over the term of the lease rather than 39
years, the term typically used for depreciating commercial
buildings.
|
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