Sale and Lease Back: What You Should Know

In banking and finance law, a “sale and lease back” represents a subtype of leasing financing that can be particularly relevant for small and medium-sized enterprises. In a sale and lease back transaction, a company purchases an asset, then sells it to a leasing company and leases it back from that company in order to continue using it.

In the following article, we have summarized the most important questions regarding sale and lease back for you:

Table of contents

• What is meant by „Sale and Lease Back“?
• How does a Sale and Lease Back work?
• What are the advantages and disadvantages of Sale and Lease Back?
• What is the target group for a Sale and Lease Back?
• What are the tax aspects of a Sale and Lease Back?
• What should be considered in the Sale and Lease Back of a real estate?
• Conclusion

What is meant by „Sale and Lease Back“?

Sale and lease back represents a special form of finance leasing in which a company sells a) a real estate property, b) a movable asset, or c) an intangible asset and then leases them back from the leasing company for use. Movable assets can include cars, machinery, or trucks; intangible assets may include trademarks or patents. The costs of use, the interest rate, and the lease term are specified in the contract. Typically, depending on the agreement, the original terms of use are restored at the end of the lease term – the original owner becomes the owner again after having paid the purchase price by means of the lease instalments. Factors such as depreciation, interest rate, monthly lease payments, and the term of the contract  usually have an impact on the repurchase price. Sale and lease back is primarily used as a financing instrument to free up liquidity while simultaneously allowing the company to use the desired asset.

Sale and lease back differs from “classic” leasing in that, in the former, the eventual lessee purchases the leased asset directly from the manufacturer in order to sell it to the leasing company and leases it back. This is not the case in classic leasing: here, the lessor purchases the asset and subsequently leases it to the lessee.

How does a Sale and Lease Back work?

The procedure for a sale and lease back transaction can be simplified as follows: a company acquires a required asset (such as a machine, car, truck, license, trademark, or real estate) and subsequently sells it to a leasing provider, who records it as an asset on their balance sheet. The lessor then makes the leased asset available to the lessee (i.e., the original owner) for use, which is contractually regulated. The lessee pays monthly instalments for this use. At the end of the contract, the lessee can repurchase the leased asset from the lessor.

What are the advantafges and disadvantages of Sale and Lease Back?

For the lessee, this form of leasing financing offers several advantages:

• Increased liquidity and equity ratio: Tied-up reserves from fixed assets are converted into liquid equity that can be used elsewhere.
• Tax benefits: Lease payments are considered business expenses and can therefore be deducted as operating costs for tax purposes.
• No capitalization in fixed assets: This relieves the balance sheet, as the leased asset appears on the lessor’s balance sheet rather than on the lessee’s.
• Low risk: The long-term predictable instalments are usually not affected by market fluctuations; moreover, unlike a bank loan, no additional collateral is required to conclude a sale and lease back agreement.

The disadvantages of sale and lease back are as follows:

• Higher fees compared to other financing options: Since the lessor must determine the value of the leased assets, appraisers are regularly engaged, and their fees for the services provided should not be underestimated.
• Fixed contract term: During the fixed term of the lease agreement, the lessee cannot repurchase the leased asset early and is bound by the lease term and a long-term payment obligation.
• No benefit from asset appreciation: The lessee generally does not benefit from any increase in the value of the leased asset, as at the end of the contract, the possibility of repurchasing is usually only at market value. A clear contractual arrangement regarding the specific terms of the repurchase right is recommended.
• No security in case of liquidity shortages: In the event of a financial shortfall, the leased asset does not serve as collateral, since it remains the property of the lessor.

What is the target group for a Sale and Lease Back?

Sale and lease back is an attractive form of financing, particularly for small and medium-sized enterprises. It is especially popular in the manufacturing sector, where the acquisition of machinery, vehicle fleets, and similar assets involves high costs. This modern financing method is often used to generate liquidity, offering good predictability with comparatively low risk, allowing the company to remain flexible, and providing additional tax benefits.

What are the tax aspects of a Sale and Lease Back?

Unlike a purchase, the leased asset does not appear on the lessee’s balance sheet; it is recorded on the lessor’s balance sheet, as the lessor is the owner of the investment asset. The leased asset is therefore balance sheet-neutral for the lessee until the end of the lease term. If the lessee subsequently repurchases it from the lessor, it must then be capitalised on their balance sheet.

Lease payments are considered operating expenses and, with the exception of certain special regulations, can be claimed for tax purposes.

What should be considered in the Sale and Lease Back of a real estate?

In addition to leasing cars, trucks, machinery, and intangible assets, it is also possible to use real estate through sale and lease back. This method frees up tied-up capital for operational purposes, allowing the company, within the limits of the underlying contract, to operate independently of landlords and freely within its own premises. The process of sale and lease back for real estate fundamentally does not differ from that of other assets: a company acquires a property, sells it to a leasing company, and leases the property back. The lease term can be individually agreed upon, as can the amount of the monthly lease payments.

Conclusion

Sale and lease back, as a special form of finance leasing, represents a valuable financing instrument and an alternative to traditional bank loans for many companies. It enables tied-up capital to be released, thereby increasing liquidity. At the same time, this form of financing reduces the tax burden, as lease payments can be claimed as operating expenses for tax purposes.

Legal advice on Sale and Lease Back

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