Municipalities often use sale-leasebacks for occupancy
There are several different leasing methods an organization can use for financing purposes. One of those methods is a sale-leaseback, where the organization initially sells the property to another owner. But once the sale is complete, the organization immediately leases the property from its new owner.
As a result, the organization continues to have use of the asset, but without having to own it. Instead, they make lease payments to the new owner. A sale-leaseback transaction can be used for just about any asset, but they’re frequently used by government organizations with high-priced assets like municipal buildings.
Example:
Suppose you work for a local government that is trying to manage its finances. Your municipality has a large government building that it would like to continue using but would like to get off its books as an asset. Instead of continuing to own the asset, the municipality sells the building to a local company and then immediately leases it back from that company. The municipality gets the benefit of taking the building off its books and receiving a large amount of cash while still occupying it.
Sale-leasebacks benefit the seller with liquidity and continued use of a building. At the same time, the purchaser gains the benefit of receiving monthly lease payments from the seller while being able to enjoy the capital appreciation of the asset. Per GASB 87, the parties must account for the sale-leaseback as two separate transactions: the qualifying sale and the lease.
What’s important here?
A sale-leaseback agreement is a financial transaction in which a company sells an asset, such as a property or equipment, to a buyer and then immediately leases it back from the buyer under a long-term lease. This allows the company to free up capital tied up in the asset while still retaining the use of it for its operations. The buyer, in turn, receives a steady stream of rental income and the asset as collateral. The parties must account for the sale-leaseback as two separate transactions: the qualifying sale and the lease.
