If you have clients in search of capital, you may want to talk to them about tapping into their own real estate equity to provide it. Sale-leaseback transactions are gaining popularity in Canada. Your clients can sell real estate and then lease it back from the new owner, retaining use of the property.
How Sale-Leaseback Transactions Work
A sale-leaseback transaction is a type of real estate deal where an owner sells a property to a buyer and then leases it back from them. Imagine a company that manufactures video game consoles. The company has purchased manufacturing sites all over Canada where it makes its products.
Now it wants to revamp its manufacturing process. New technology has become available, making the production of consoles much more efficient. But this technology isn’t cheap, and to invest in it, the company needs capital.
By selling one of its properties and leasing it back from the new owner, the company can free up its own equity to use as capital. It can take this money and invest it in the latest manufacturing technology. Best of all, the company suffers no interruption in its operational capacity, since the property remains under its control throughout the process.
How to Complete a Sale-Leaseback Transaction
In its simplest form, a sale-leaseback transaction needs only two parties: an interested seller and a willing buyer. But your clients should consider bringing others into the fold to ensure a smooth transaction. The first is you. As the accountant, you can provide valuable insight to protect your client, from valuing the property to structuring the deal. Your client also benefits from getting a lawyer involved.
Benefits to Sellers and Buyers
Both sellers and buyers can benefit from sale-leaseback transactions. The selling company gains working capital without having to take on debt or give up ownership shares in the company. Divesting of properties can also free up human capital to focus on core competencies. After all, a manufacturing company is not in the business of real estate investing or property management.
On the buyer side, a sale-leaseback offers a safe, stable way to invest in commercial real estate. For income-producing properties to pay off, investors need reliable tenants. Sale-leaseback deals can supply them if lease terms span 10 years or longer.
The Tax Implications of a Sale-Leaseback Transaction
The tax treatment of sale-leaseback transactions in Canada has long been fraught with confusion. A 2013 Federal Court of Appeal (FCA) case provided much-needed clarification.
In C.A.E. Inc. v. The Queen, the FCA made two important rulings. One, a company may report the gain from the sale portion of a sale-leaseback transaction as a capital gain rather than as ordinary income. Two, the seller may also continue to claim capital cost allowance deductions on sale-leaseback properties.
A sale-leaseback transaction provides your clients a way to free up capital without taking on debt, issuing stock, or disrupting day-to-day operations. As their accountant, help them get the most out of this unique type of business deal.