Asset sale lease-backs are not a new idea. However, it is an idea that makes good sense today. Corcentric’s Patrick Gaskins and Mike Hamilton go over the basics to explain why this strategy might work to your advantage in current market conditions.
Asset sale lease-backs are not a new idea. However, it is an idea that makes good sense today. But before we get into why this strategy works to your advantage, given current market conditions, let’s go over some basics.
The transaction is one where the owner of an asset sells the asset and then leases it back from the buyer. Sale and lease documentation are completed simultaneously. The seller of the assets will become the lessee and the buyer of the assets becomes the lessor. The seller will treat the income from the sale of the asset as normal revenue, which will have income tax implications. The buyer of the assets will have the ability to depreciate the assets under the current 100% bonus depreciation schedule.
Companies consider sale lease-backs when they need to free up cash invested in their assets, but still need those assets for their daily operations.
Here are some scenarios in the trucking industry where sale lease-back makes sense for the owner of the asset.
From these scenarios, it is easy to see the advantage for the company that originally owned the assets. However, a finance company might be wondering what’s in it for them. They may ask, “Why do I want to take on the risks associated with owning used assets?”
The answer: Access to lending volume now versus having to wait six to nine months for equipment to be delivered, given current production backlogs. The market is going to continue to be challenged throughout 2019 with long manufacturing lead times. Even if there is a bit of softening in the order boards, it won’t be until the third or fourth quarter or into 2020.
Most finance companies have funding goals on a monthly basis and do not have goals to do 100% of their funding volume in the June-to-December timeframe. Purchase and lease-back is a good way to access volume throughout the year. And under current depreciation standards, lessors can depreciate 100% of the used asset value in the year it is purchased.
This strategy can also differentiate the lender, but it is not without risks. The risk to the lender is the same as that of the fleet operator who initially owned the asset. To mitigate risks, the lender has to keep a watchful eye on the cost of the asset and needs to make sure they are depreciating the asset value on their books to an acceptable level over the term of the lease.
When executed properly, purchase lease-back deals benefit the fleet by giving them an infusion of cash, and they give the lender volume and quality assets which have a good rate of return. Purchase lease-back offers something for everyone.
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