What Is a Leaseback Arrangement?

Leasing back your building involves two separate entities serving as landlord and lessee of a particular property. Typically, one business entity or individual would buy the property and take on all the normal rights and duties of an owner. The second entity — either owned by all the same parties or by some of the same parties — leases the commercial property and pays monthly rent on it. 

A leaseback arrangement is a valid legal tool because the two business entities are separated in the eyes of the law. Both entities should meet the standard requirements of their position — such as reporting rent expense and income on their tax forms — but they have flexibility beyond that. 

What Are the Pros and Cons of Leasing Back?

The question that you may have is what is the benefit of taking on this additional investment and effort? There are several key benefits for your business.

Pros

First, rather than paying rent to a separate landlord who reaps the benefits of ownership, your business entity would reap the rewards. The building owner would be able to deduct expenses like depreciation, repairs, maintenance, and landlord-related travel costs. So even though the landlord reports added income, these expenses lower the taxable amount considerably. The building can then be sold for a profit later.

Meanwhile, the lessee continues to deduct rent expense (and related costs) against their income as well. If the lessee business previously owned the building, their balance sheet may also look better. 

As the landlord, those who are in control of the two entities can also work together to manage the building. Because the same parties may own the building and be the lessors, you can choose what repairs and maintenance tasks to undertake. This shared interest allows both lessor and lessee to act in the best interests of both when it comes to things like layout and improvements or tax planning and rent adjustments. 

Cons

The biggest downside of a leaseback agreement is generally the upfront expense of purchasing the building. Your business entity ties up a lot of cash with this investment and is responsible for its expenses if things take a downturn. As with all capital purchases, your business should be able to absorb these costs and manage them with a healthy buffer.

Keep in mind that you may not feel as free to sell the asset if your own business is using it as a lessee. Similarly, that connection might make the lessee business less apt to move physical locations if things change in their market. 

Where Should You Start?

Are you interested in taking advantage of a leaseback arrangement? Many businesses find that this method can help reduce taxable income and make two profitable businesses out of one. And the added control and flexibility may make running your business easier and more efficient. 

However, before embarking on something as complex as a leaseback arrangement, consult with experienced professionals. This includes both a qualified CPA (certified public attorney) and a business lawyer. Together, you may need to form an entity for the ownership, craft the contracts, and decide on the tax planning for this new agreement. Bliss & Skeen can help. Make an appointment today to learn more.