What Are the Pros and Cons of a Leaseback?

Leaseback is a very effective way of financing real estate. A leaseback business is actually composed of two concurrent economic activities. The first is the real estate buying and selling relationship; the second is that the real estate investor leases the purchased real estate to the seller of the real estate, which is another real estate leasing relationship. In a leaseback business, both parties have dual identities, that is, the seller is the lessee and the buyer is the lessor. Specifically, leaseback means that a real estate operator sells a real estate to an investment institution, and then operates as a real estate lessee. The lease period is generally very long. During the lease period, the real estate lessee pays the rent to the investment institution, that is, the real estate owner. The rent consists of two parts, one is the repayment of the real estate payment in installments, which is the principal amount; the other is the investment return of the investment institution, which is interest. ^[1]

Leaseback

Right!

Leaseback is a very effective way of financing real estate. A leaseback business is actually composed of two concurrent economic activities. The first is the real estate buying and selling relationship; the second is that the real estate investor leases the purchased real estate to the seller of the real estate, which is another real estate leasing relationship. In a leaseback business, both parties have dual identities, that is, the seller is the lessee and the buyer is the lessor. Specifically, leaseback means that a real estate operator sells a real estate to an investment institution, and then operates as a real estate lessee. The lease period is generally very long. During the lease period, the real estate lessee pays the rent to the investment institution, that is, the real estate owner. The rent consists of two parts, one is the repayment of the real estate payment in installments, which is the principal amount; the other is the investment return of the investment institution, which is interest. ^[1]

Chinese name

Leaseback

nickname

Down lease

Therefore, the developer can sell the property at a price lower than the market price (generally not lower than 75% of its market price, that is, the proportion of the leaseback financing is higher than the upper limit of the mortgage loan ratio), and the capital can be recovered in time. And signed long-term leaseback contracts with investors. As the selling price of the property is lower than the market level, the rent paid by the developer to the investor is also lower than the market level. For investors, leaseback can bring them a higher return on investment than a mortgage loan, and he has control over the property. After the lease period ends, the property can continue to be leased or sold for more substantial returns. For developers, the biggest advantage of leaseback financing is that they can take up less of their own funds. In addition, rents are used as operating costs in finance and should be deducted from tax revenue, so developers can get a certain amount of tax exemption. But the leaseback financing also puts forward higher requirements for the developer's operating level-its expected operating rate of return must be higher than the cost of leaseback financing. In addition, after the leaseback period expires, the developer cannot obtain property rights.