Sale and Leaseback

Jenna Doucet, Camile-Lyn Mundy, Richard Davidson,
Charles Tranhike Mary Moroso (2010).

Sale and Leaseback

The U.S. economy is slowly recovering from a credit crisis that has gravely impacted the housing market. Although, the recession take took place through most of 2008 and 2009 is now mostly over, the devastating consequences it has had for many homeowners will not be soon forgotten. Before the recession began the housing market was booming, individuals’ were borrowing more money than they could afford to finance homes that were grossly overpriced. As the recession made way, individuals’ were losing their jobs, forgoing mortgage payments and forced to sell their homes or undergo foreclosure. The possibility of losing their homes, sparked creativity in some individuals and a new trend in sale- and leasebacks emerged. The article Homeowners should steer clear of sale-leasebacks, provides valuable insight into this new trend, the intended purpose of the sale-leaseback, and on the legal implications of going from homeowner to tenant.

Traditionally, sale and leasebacks have been used in commercial real-estate as a way for businesses to generate capital to fund expansions or to take advantage of tax deductibles. For one lease payments are one-hundred percent tax deductable and renting instead of owning assets impacts the company’s balance sheet as those assets are converted into contingent liabilities (Lecky, 2009). Large corporations such as the New York Times, Bank of America, SunTrust and Citibank have all benefited from multi-billion-dollar sale and leaseback agreements says the article, however it is a completely different ball game in residential real-estate. The article quotes, Steve Goddard, an experienced realtor in California who says “ These deals are pretty complex things” (Para, 3), “ And even people that have some expertise or real estate acumen call attorneys before signing anything, much less homeowners” (Para, 3). As the purpose behind the sale-leaseback, is often to give desperate homeowners a way to stay in their homes, it is unlikely that the homeowner will have the resources to pay for a proper leaseback agreement. According to the article the supposed win-win of the homeowner receiving capital to pay his or her bills, and the buyer’s built-in tenant is just a façade for bigger risks. Accordingly, if the buyer runs into his or her own financial potholes, the original homeowner, now tenant will have little legal recourse of staying in their home. Furthermore, in residential real estate sale-leasebacks “ often end up costing more money in the long-term: the seller becomes a renter and losses the chance to built equity in their home” (Para, 5).

The individuals rights also change when becoming a tenant. For example, the tenant is now expected to comply with the requirements of the lease contract and has less flexibility once the title of the property changes and is registered in the name of the new owner. Perhaps one of the most significant changes is that the owner, now tenant can no longer use the property as a security for financial loans. Another important matter is that as the tenant is both the seller and occupant, he or she cannot expect the new landlord to guarantee the building or its conditions. As a result, it is often stipulated in lease agreements that the tenant is fully responsible for maintaining the property and assuming the capital costs. The tenant will not benefit from the capital expenses he or she assumed while occupying the premise once the contract is over (Hahn, 2007). Additionally, all changes, improvements or modifications of the premise will have to be approved by the landlord and not subject to the original owners taste as it was previously.
Sale-leaseback is a very versatile arrangement as it fits into any property type. In conclusion a sale-lease back agreement can be quite an attractive alternative when a individual is faced with the possibilities of losing their property. The advantages can be interpreted to both buyer and seller. The buyer gets a built-in tenant, and the original owner gets to retain his or her property on the terms outlined in the agreement. However, there is a good chance of disappointment and entering into a residential sale-leaseback arrangement as varying un-foreseen circumstances may arise in which the original owner now the tenant will have little or no recourse in a court of law to stay in their home.


References

Anonymous (March, 2009). Homeowners should steer clear of sale-leasebacks.

LexisNexis. Retrieved on March 1, 2010 from: http://www.allbusiness.com/real-
estate/commercial-residential-property-commercial/11913434-1.html

Hahn, T. (2007). Sale-Leaseback transactions. Blakes. Retrieved on March 1, 2010
from:http://www.blakes.com/english/view.asp?ID=1897

Lecky, J. (2009). Demand increases for sale/leaseback transactions. Retrieved on March 1, 2010 from: www.avisonyoung.com/.../AY_Sale_leaseback_article_no_blue.pdf