Sale and Leaseback
Is a contract to raise cash by selling the freehold to a piece of property and simultaneously buying it back on a long-term lease. This ensures that a firm can stay in its factory, shop or office premises and therefore can carry on trading as if nothing has happened, yet the capital released through this process can enable the firm to expand or to survive a difficult trading year. On the face of it, carrying out a sale and leaseback deal is a short-termist act, enjoying extra cash today at the cost of future annual rental payments plus the threat of becoming ‘homeless’ at the end of the lease period. As the diagram below shows, however, as long as the profits generated by the cash raised are greater than the annual rental payments, the firm’s long-term future should be sound.