Sale-Leaseback Transactions in the 'Corporate Scandal' Era

Since the corporate scandal trials almost always involve financial re-engineering, it is no surprise that these trials and the concomitant publicity would have an impact on sale-leaseback transactions (“SLTs”) and those planning such transactions. It thus should be expected that in the post-Enron era, all financial and accounting transactions will be examined with a heightened degree of scrutiny, particularly those with an aroma of fancy accounting. Corporate executives and outside advisers now know that it is much harder to obtain a free pass for bad accounting. With the stakes for advising aggressively on SLTs having been significantly raised, it follows that SLTs are now becoming increasingly more difficult and complicated to complete.

SLTs have been a favored “financing” technique because a property owner can obtain more capital from the “sale portion” of an SLT than by retaining ownership and arranging a conventional mortgage. SLTs allow the property owner to realize up to 100% of the fair market value of the property ' significantly above what traditional loan-to-value lending would provide ' while retaining full possession and use of the property. Of even greater importance, if the leaseback portion of the SLT is treated for financial accounting purposes as a true “operating lease” (as opposed to a “capital lease”), the seller will be able to strengthen its financial statements because the full amount of the proceeds from the sale of the property will be treated on the balance sheet as an increase in assets, and the seller will retain possession and use of the property without an offsetting liability on the balance sheet (although a footnote to the balance sheet will be required).