Sale and Leaseback

Under a sale and leaseback arrangement, a firm sells an asset to another party, and this party leases it back to the firm. Usually, the asset is sold at approximately its market value. The firm receives the sales price in cash and the economic use of the asset during the basic lease period. In turn, it contracts to make periodic lease payments and gives up title to the asset.' As a result, the lessor realizes any residual value the asset might have at the end of the lease period, whereas before, this value would have been realized by the firm. The firm may realize an income tax advantage if the asset involves a building on owned land. Whereas land is not depreciable if owned outright, lease payments are tax deductible so the firm indirectly is able to amortize the value of the land. Lessors engaged in sale and leaseback arrangement include insurance companies, other institutional investors, finance companies, and independent leasing companies.