Definition: A leaseback, also referred to as a sale and leaseback, is a structured transaction that allows an organization to sell an asset to an external entity, while maintaining the legal rights to use the asset.
What Does Leaseback Mean?
What is the definition of leaseback? Simply speaking, a leaseback transaction is a strategic form of financing large capital investments used in operations. This is extremely popular within industries that require expensive assets, such as the airline industry or the railroad industry.
From the lessee’s perspective, the lease-back may alleviate the need to leverage large sums of cash to purchase equipment and reduces a lot of the risk of ownership. From a lessor’s perspective, the lease-back sale method may increase the marketability of products and provide a more reliable return while maintaining ownership of the asset.
Let’s take a look at an example.
Example
Overview of a leaseback transaction. While somewhat debatable, the leaseback transaction has evolved from the “off balance sheet” financing tactics leveraged by the airline industry many years ago. During tough economic periods, the extreme operating costs associated with airplane ownership and the pressures to lower ticket prices stressed the financial position of many airlines. As competition increased, airlines looked for strategic methods for managing cash flow.
The leaseback transaction was developed, which allowed an airline to purchase a plane, sell it to a leasing company, and immediately lease the plane for use in operations. The airline greatly reduced the cash burden of purchasing an airplane from the manufacturer and was able to spread the expense of the plane over the life of the lease. Upon finalization of the lease term, the airline was responsible for returning the plane to the leasing company, who could then sell the plane at a favorable profit margin.
Summary Definition
Define Leaseback: Lease back means a transaction structured by the sale of an asset that requires the buyer to lease the asset back to the seller.
