Sale and Leaseback

What is sale and leaseback?

Sale and leaseback (sale with leaseback) denotes a transaction in which a company sells an asset of its own and immediately afterwards rents or leases it back. The buyer, and thus the provider of the financing, is a leasing company or, above all for real estate, an institutional investor. The business continues to use the asset unchanged; what changes are ownership, the balance sheet and cash flows. It is comparable to a homeowner who sells the house and stays on in it as a tenant: the homeowner receives the purchase price in one sum and pays rent from then on.

The structure is used to release capital tied up in real estate, machinery or vehicle fleets. The parties involved are the selling company as the future tenant, the buyer as landlord and the banks that currently finance the asset. The transaction is documented in two contracts. The sale contract for land must be notarially authenticated (Section 311b (1) of the German Civil Code, BGB). The lease or rental contract regulates term, instalment, options and the allocation of costs. Sale and leaseback is regarded as a special form of leasing.

How sale and leaseback works and its effect on liquidity

The purchase price flows in once. In return, ongoing payments arise over the contract term, and at the end the asset is at the buyer's disposal, unless a purchase or extension option has been agreed. Economically, the structure resembles a loan whose collateral is not encumbered but transferred.

How much liquidity actually arises depends on three variables: the achievable purchase price, the tax on a disposal gain and the repayment of existing financing. Often the asset already serves as collateral for a loan: for land through a land charge (Grundschuld, a pledge registered in the land register in favour of the bank), for machinery through a transfer of title as security. In that case, the purchase price is first used to repay the secured loan, and the sale requires the bank's cooperation. Compared with a loan against a land charge, sale and leaseback can release more funds. The buyer pays the market value, whereas banks finance only part of the mortgage lending value, a cautiously determined value that is usually below the market value.

Accounting and taxes in sale and leaseback

Under the German Commercial Code (Handelsgesetzbuch, HGB), the decisive question is to whom the asset is economically attributable after the leaseback agreement. If economic ownership passes to the buyer, the asset leaves the balance sheet. The difference between the purchase price and the carrying amount, the value in the balance sheet after previous depreciation, is reported as income, and the instalments are ongoing expense. If the asset remains attributable to the seller under the standards of the German leasing circulars (Leasingerlasse), for example because of a very long basic lease term or a favourable repurchase option, there is no sale for accounting purposes. The asset then remains on the seller's balance sheet, and the purchase price is reported as a liability. Whether a gain may be shown immediately in full has to be agreed with the auditor, above all where purchase price and rent deviate from market levels.

By comparison, IFRS 16 applies to companies that report under the international standards IFRS. Under it, the seller first examines whether a sale exists at all under IFRS 15. If it does, the seller derecognises the asset and recognises a right-of-use asset and a lease liability. The right-of-use asset is measured by the share of the previous carrying amount that relates to the retained right of use. The seller shows a gain only for the rights actually transferred. If there is no sale, the asset remains on the balance sheet, and the purchase price is recorded as a financial liability. A shortening of the balance sheet as under HGB therefore hardly occurs under IFRS.

For tax purposes, the book gain is taxable as ongoing profit: for a GmbH (German limited liability company), with corporation tax, solidarity surcharge and trade tax. For land and buildings, it can be transferred to certain replacement investments under Section 6b of the German Income Tax Act (EStG), so that taxation is deferred. To qualify, the asset must, among other conditions, have belonged to the fixed assets for at least six years. Real estate transfer tax is generally borne by the buyer, who prices it into the purchase price or the rent; a later repurchase triggers it again. If the asset is acquired not by an outside investor but by a shareholder or a company belonging to the shareholder, a business split (Betriebsaufspaltung) and questions of hidden profit distribution can arise.

Suitable assets and content of the sale and leaseback contract

Suitable assets are those with a secondary market and a reliably determinable value: operating, logistics and office properties, standard-specification production machinery, vehicle fleets and other means of transport. Custom-made items and plant heavily tailored to a location can hardly be realised; buyers for them are found only at large discounts or not at all. The contract must regulate above all:

• Term and extension options: For real estate, terms of ten years and more are common. For sites essential to operations, extension options secure use beyond the basic term.
• Repurchase or pre-emption right: It preserves the possibility of buying the asset back later, but affects the accounting attribution.
• Allocation of costs: For real estate, the tenant often bears maintenance, insurance and property tax largely itself.
• Value protection: Index clauses adjust the rent to price developments and increase the burden over the term.
• Form: Rental contracts for land and commercial premises with a term of more than one year have required text form since 2025 (Section 578 in conjunction with Section 550 BGB). If it is missing, the contract is deemed to have been concluded for an indefinite period and can be terminated early by ordinary notice.

Sale and leaseback in a company sale

Before a sale, owners frequently separate operating properties from the operating business, either by selling to an investor or by transferring them to a separate property-holding company with subsequent letting. The buyer then does not have to co-finance the property, and the circle of possible buyers becomes larger. The new rent, however, reduces EBITDA (earnings before interest, taxes, depreciation and amortisation) and thereby, where valuation is based on a multiple of this result, the company value. Economically, the separation pays off only if the net proceeds from the property exceed this reduction.

Buyers also use the instrument. In acquisitions by financial investors or in a management buy-out, the target company's real estate assets are occasionally sold and leased back in order to finance part of the purchase price. Buyers examine existing leaseback contracts in due diligence for term, rent level, options and termination rights; a rent above market level reduces the value of the company.

Worked example: sale and leaseback of an operating property

A manufacturer of measurement technology owns its operating building. The carrying amount is EUR 1.8 million; a valuation report determines a market value of EUR 4.0 million. An investor buys the property at market value and leases it back for 15 years; the initial rent is 6% of the purchase price. All figures are assumed.

• Transaction costs, assumed at 1.5% of the purchase price: EUR 4.0 million × 1.5% = EUR 0.06 million
• Disposal gain after costs: EUR 4.0 million minus EUR 1.8 million minus EUR 0.06 million = EUR 2.14 million
• Income taxes without a transfer under Section 6b EStG: EUR 2.14 million × 30% = about EUR 0.64 million. The rate of about 30% is assumed (as at 2026: corporation tax of 15% plus solidarity surcharge and trade tax depending on the local multiplier).
• Liquidity inflow after taxes and costs: 4.0 minus 0.06 minus 0.64 = about EUR 3.30 million
• Annual rent: EUR 4.0 million × 6% = EUR 240,000; over 15 years without value protection EUR 3.6 million
• By comparison, a loan against a land charge for an assumed 60% of the market value: EUR 2.4 million, without a tax burden and with ownership retained

If the owner then plans to sell the company at seven times EBITDA, the new rent reduces the company value by EUR 240,000 × 7 = EUR 1.68 million. Against this stands the net inflow of about EUR 3.30 million, a calculated advantage of about EUR 1.62 million. The simplified calculation assumes that the buyer applies the multiple unchanged and does not include the rental obligation in net debt.

If the property stays in the company, the buyer in economic terms pays for it only with seven times the rent that the company then does not have to pay, here EUR 1.68 million. Separately, it achieves the price that real estate investors pay, here EUR 4.0 million before taxes and costs. In return, the company bears a rental burden of initially 6% of the purchase price per year and gives up the building at the end of the term.

Distinctions: leasing, factoring and loans against a land charge

• Leasing: The lessor usually acquires the asset new from the manufacturer, after selection by the lessee. In a sale and leaseback, it comes from the lessee's own stock.
• Factoring: likewise releases tied-up capital, but in current assets, through the sale of receivables.
• Loan against a land charge: Ownership remains with the company, and the bank finances only part of the mortgage lending value.

Common mistakes

• Only the purchase price considered. The inflow is visible immediately; the sum of the rents and the loss of the residual value at the end of the term appear only in the overall calculation.
• Tax on hidden reserves forgotten. Hidden reserves are the difference between market value and carrying amount. For assets held for a long time and largely depreciated, the tax on them can reduce the net inflow considerably.
• Location not secured. Without an extension option or repurchase right, use of a property essential to operations depends on the investor after the term expires.
• Banks not involved. Land charges, transfers of title as security and negative pledge clauses in loan agreements make the banks' consent necessary.
• Sale under time pressure. Buyers recognise a strained liquidity position and price it into the purchase price and the rent.

Frequently asked questions

When does sale and leaseback make economic sense?

If the funds released earn more in the company than rent and giving up ownership cost, or if other financing routes are not available. Before a company sale, separating the property from the operating business can also increase the total proceeds.

Does sale and leaseback improve the equity ratio?

Under HGB often yes. The asset leaves the balance sheet, the book gain increases equity, and liabilities can be repaid with the proceeds; both raise the equity ratio. Under IFRS 16 hardly, because a lease liability arises; banks and buyers also add the rental obligation in their analysis.

Can the company buy the asset back later?

Only if a repurchase right has been agreed. Its terms affect the accounting attribution, and for land, real estate transfer tax is incurred again on repurchase.

Is sale and leaseback suitable for technology companies?

Rarely. Software and digital services companies usually own hardly any realisable fixed assets. The structure becomes relevant for companies with their own production or logistics properties, for example in hardware, medical technology or industrial technology.

Is VAT charged on sale and leaseback?

On the sale of machinery or vehicles, as a rule yes; on the sale of land, as a rule no. Land sales are in principle exempt from VAT because of real estate transfer tax (Section 4 no. 9 (a) of the German VAT Act, UStG). Between businesses, an option to tax is possible, which can avoid a correction of input VAT previously deducted. If the buyer receives no power of disposal and the transfer of title serves only as security, the tax authorities in principle regard this as an exempt granting of credit.

Is there sale and leaseback for cars and for private individuals too?

Yes. Companies sell, for example, their vehicle fleet to a leasing company and lease the vehicles back. For private individuals, the model is offered for their own car or owner-occupied property. What matters there are above all the purchase price compared with market value, the amount of rent and the duration of the right of use.

The Roemer Capital view

Where sale and leaseback is considered as a way of financing, Roemer Capital sets the structure in the financial planning alongside loans, development loans and equity. It converts each variant into liquidity after taxes and ongoing burden. The central question is whether the company can securely retain the location over the planned period of use. The term and options of the rental agreement therefore belong in the economic assessment from the start and not only in the draft contract.

In preparing a company sale or a succession, Roemer Capital clarifies early whether properties essential to operations are sold with the company, separated in advance or sold to an investor. For each variant, it shows the effect on EBITDA, purchase price and the circle of buyers. The tax and legal implementation lies with the client's tax adviser and law firm.