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Sale-and-Leaseback Transaction. A Funding Method

Cecilia Magda Dan and Dana Ababei

The Valuation Journal, 2014, vol. 9, issue 1, 34-53

Abstract: Sale-and-leaseback transaction - leaseback, in short - is a financial transaction whereby one sells a real asset and leases it back for the long term, which enables the seller to continue to use it in exchange of a lease payment. Our paper dwells on the benefits of such a funding method. The leaseback transaction redeems quite a large amount of money in cash and cash equivalents and yet does not impair the company's operation, since the real asset is still to be used under the same conditions; the seller can thus benefit from substantive liquidities to be used for other investment and enjoy the advantage of alternative funding sources whenever the ratio of bank ineptness is too high or the real asset is undervalued in mortgage lending; the negotiation of the real estate transaction clauses bears on the principle of a reasonable lease; it is possible to separate asset management from operational activities, provided the seller wishes so, which entails lower costs and flexible negotiation conditions. The valuation methodology is set out in the ANEVAR Valuation Standards. In order to evaluate the worth of a hotel-like real asset, we started from the market value of an income generating property (PIGA). Our study introduces a notion that is perhaps less used, i.e. the "bearable" or "reasonable" rent, meaning that the level of the rent for any real estate should bear on the financial standing of the tenants.

JEL-codes: G32 (search for similar items in EconPapers)
Date: 2014
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Handle: RePEc:vaj:journl:v:9:y:2014:i:1:p:34-53