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Accounting for Real Estate Transactions: A Guide For Public Accountants and Corporate Financial Professionals, 2nd Edition by Maria K. Davis

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Chapter 5

Sale-Leaseback of Real Estate

5.1 Overview

Sale-leaseback transactions involve the sale of property by the owner and a lease of any or all of the property back to the seller, allowing the seller to retain the use of the property after ownership is transferred. The sale and leaseback of real estate, frequently used for the financing of warehouses, distribution centers, office buildings, hotels, research and development facilities, and many other types of real estate properties, is a form of asset-based financing. In a typical sale-leaseback transaction, the seller-lessee gives up the residual value of the property, which can be substantial for real estate assets. As a result, the periodic payments under the lease may be lower than interest payments on other forms of financing. Another reason for entering into sale-leaseback transactions may be the desire to move the property and related debt off a company's balance sheet, thereby improving a company's debt-to-equity ratio. Loan agreements or indentures with restrictive debt covenants may place a limit on the amount of debt a company may have outstanding. Through sale-leaseback transactions that allow for a derecognition of the asset and related debt, companies owning real estate may be able to enter into new borrowing arrangements that would otherwise not be available.

When entering into sale-leaseback transactions, seller-lessees need to consider the tax consequences: A tenant of the property is entitled to deduct rental ...

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