A leaseback refers to a situation where we sell an asset to somebody else and then lease it back off them. This may seem like an odd thing to do but there can actually be a few advantages in doing this. For one thing, it means that you can still enjoy the benefits of this asset even though you don’t actually own it anymore. In a lot of situations having the use of something is a lot more important than actually having ownership of it.
How a Leaseback Works in Practice?
There are many reasons why an individual or business would want to sell an asset and lease it back. The number one reason is that it allows them to free up capital. This could involve selling property, equipment, or vehicles used by the company. For example, if the company needs a cash injection they could sell their business jet and then lease it back from the new owner. This would mean that they would have cash on hand and they will still get to use the company jet.
In most situations the leaseback will be beneficial for both the buyer and the seller. The entity who is selling the asset will have gained a lump sum of money without losing too much. The seller will have likely both the asset for a relatively cheap price and they can look forward to a regular income in the form of a lease repayment. Some people who choose to buy an asset as part of a leaseback agreement will do so because it can be a good investment over time. A lot will depend though on the deal agreed and like all other investments it isn’t risk free.
Variations on the Leaseback
There are actually different variations on how the leaseback works. Sometimes there will be a clause that allows the seller the option of buying the asset back at a later date. There can actually be good tax incentives for doing this because it means whoever owns the asset at the time may be able to claim tax credits. It is usually recommended that those who do have an option to buy back should wait until the end of a tax year so as to avoid problems with the Inland Revenue. The standard leaseback will not have a buy back option and the new owner can enjoy indefinite ownership of the asset.
Bankruptcy and Leaseback
It is possible for companies to use the leaseback arrangement to hide assets should they fear they are about to go bankrupt. This can be a very risky move for the seller and buyer because the court could actually dissolve the leaseback agreement so that these assets are returned to the original owner. This will mean that the buyer could have invested a lot of money and now not have anything to show for it. This is one of the huge risks of a leaseback agreement and anyone considering buying such an asset should proceed with caution.