Sale and leaseback transactions: Overview, definition, and example
What are sale and leaseback transactions?
A sale and leaseback transaction is a financial arrangement in which a company sells an asset—typically real estate, equipment, or machinery—to a buyer and then leases it back from the buyer under a long-term agreement. This allows the company to free up capital while continuing to use the asset for its operations.
For example, a manufacturing company might sell its factory building to an investor for $10 million and then lease it back for 10 years, ensuring continued use of the facility while unlocking immediate cash.
Why are sale and leaseback transactions important?
Sale and leaseback transactions are important because they provide businesses with liquidity without disrupting operations. Instead of tying up capital in owned assets, companies can convert them into cash while maintaining operational continuity through leasing.
For businesses, these transactions help improve cash flow, optimize balance sheets, and reduce debt levels. They are commonly used by companies in real estate, aviation, and manufacturing to reinvest in growth or pay off existing financial obligations.
Understanding sale and leaseback transactions through an example
Imagine a retail chain that owns multiple storefronts. To raise capital for expansion, the company sells several locations to a real estate investment firm for $50 million and immediately signs 15-year leases to continue operating in those locations. This provides the retailer with immediate funding while keeping its stores open.
In another scenario, an airline company sells its fleet of aircraft to a leasing company for $500 million and leases them back under long-term operating leases. This allows the airline to free up capital for new routes and business expansion while still using the planes.
Example of a sale and leaseback clause
Here’s how a sale and leaseback clause might appear in a contract:
"The Seller agrees to sell the Property described in Exhibit A to the Buyer for a purchase price of [$X] and simultaneously lease the Property from the Buyer under the terms set forth in the Lease Agreement. The Seller shall have the right to occupy and use the Property during the lease term, subject to the agreed rental payments and conditions."
Conclusion
Sale and leaseback transactions enable companies to convert owned assets into cash while retaining operational control through leasing. These transactions help businesses unlock capital, improve liquidity, and maintain financial flexibility, making them a valuable financial strategy for long-term stability and growth.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.