FINANCE (SALE & LEASEBACK) (PURCHASE AND LEASE)
popular method of finance particularly for large specialist
investment properties. A typical leaseback arrangement is as follows:
- finance is arranged from a
- the financier meets all the
costs of acquisition, building and development.
- the property stays in the
ownership of the financier
- the financier grants a lease
to the developer, or large company for subletting, or occupation by the
- the rent paid is based on the
cost of building, the expected life of the premises, plus a profit rent
based on the type of premises.
financing is the release of capital for use in a business by leasing
the required real estate in lieu of ownership. Typical lessors are:
- suppliers of
and leaseback finance is a very good method of raising finance where
a large company owns land and wishes to raise capital. The company
enters into a sale and leaseback agreement with a financier. If the
company does not own land, it can enter into a purchase and leaseback
agreement with a financier who purchases a suitable site and develops
it for the use of the company. Both methods are popular for large
development projects such as:
- office towers
factories, plant operations etc.
example is as follows:
- a company
completes the project and negotiates for long term finance with a
lending institution by way of leaseback.
- the institution
after investigation, accepts the company's proposals and buys the
property at market value.
- a leaseback
document is attached to the contract of sale. this is a formal lease in
which the institution agrees to lease the property to the company,
usually for the expected life of the premises.
typical leaseback document consists of:
financier agrees to finance the development with a ceiling cost and
agrees to grant the lessee company a lease from the date of
completion according to the terms and conditions in the annexed draft
- THE AGREEMENT
BETWEEN THE LESSOR AND LESSEE:
"standard form" lease document adjusted to cover specific
terms such as rental reviews, responsibility for outgoings etc.
TO THE LESSEE
finance is not prejudiced by a mortgage.
term occupancy provides security of tenure.
- the building
can be designed to meet the requirements of the lessee.
- has full
control over management. this can be important for some land uses for
example, shopping centres.
- enjoyment of
- the rent is
totally tax deductible compared to an equivalent mortgage payment in
which only the interest part is deductible.
- the arrangement
releases capital for the lessee to expand his/her business, the
operation of which provides a higher rate of return than that
obtainable from real estate.
TO THE LESSOR:
- a long term and
comparatively safe investment.
- a large amount
of money is invested at the one time. This reduces management and
control costs in the investment portfolio.
- safety net of
owning the land (will probably enjoy capital gain).
- profit rents
are additional income.
is common to have in the agreement an option for the lessee to buy
the premises at the end of the leaseback period. This is usually at
market value which should approximate land value. However, it is more
likely that the lessee would "roll the agreement over" so
that new premises can be built.