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What is the nature of a "sale-leaseback" transaction?

1. What is the nature of a "sale-leaseback" transaction?

2. A company is considering expanding operations and is in the process of determining the strategy that will be used for the financing. After a great deal of debate, management determines that it may issue bond with the proceeds needed to purchase additional assets or the company could lease the assets on a long-term basis. Without knowing the comparative costs involved what might be the advantages of leasing the assets instead of owning them.

3. Explain the distinction between a direct-financing lease and a sales-type lease for a lessor?

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1. What is the nature of a "sale-leaseback" transaction?

A sale-leaseback, sometimes called just a leaseback, is when a seller wants the use of the asset but wants to free up the capital in the asset. So, they sell it and then lease it back from the buyer. This permits the seller to get cash but also to retain the use of the property. It is similar in substance (but not legal form) to getting a loan with the asset as collateral for the loan.

The leaseback has advantages for the seller. He can keep the property and continue to use it in the business, hopefully generating enough income to make the lease payments. And, in addition, he now how a large lump sum cash that he can use for expansion or other goals without interrupting the use of the leased asset.

The leaseback has advantages for the buyer. He acquires an asset with an immediate cash flow stream, a known demand, and a return on investment with high probability (less speculative). Often the lease is a long term lease and so it will be low maintenance as the lease is likely for the full economic life of the asset. Some leases also guarantee a salvage value at the end of the lease, making the return even more attractive.

2. A company is ...

Solution Summary

The nature of a "sale-leaseback" transaction is examined. Your tutorial is 892 words in everyday language suitable for a novice. One reference is provided.