A leaseback agreement, or a sale and leaseback agreement, involves a property owner selling his property, and then agreeing to lease it back from the buyer. The leaseback agreement allows the property owner to extract the current market value of the property while keeping the right to use the property.
Leaseback agreements were one of the earliest arrangements that allowed retired homeowners to gain access to the equity in their homes, while ensuring that they would have a place to live. Home equity lines of credit and reverse mortgages accomplish the same goal, but they do not extract the entire value of the property at once. This gives the property time to appreciate in value, so that the homeowner can borrow more money from the stored equity.
Government agencies can also use a leaseback agreement to provide operating funds. The organization signs a leaseback agreement for offices or other property it holds, allowing it to avoid raising taxes or cutting services. Unlike financing a project with a bond or a levy, the government agency usually doesn't need to get the approval of voters to establish a leaseback agreement. The government agency can buy back the office building later, when economic conditions approve. According to the state of California, the leaseback agreement may provide tax-free rental income to the landlord, depending on how the government agency structures the agreement.
The main disadvantage of a leaseback agreement to the seller is that the property owner does sell the property, which grants the landlord rights to the property. The tenant has to keep the property in good condition, and the landlord can establish usage restrictions. Leaseback agreements usually have longer terms than standard residential or commercial leases, so the tenant may have to make lease payments for many years. According to the Congressional Budget Office, many municipal leaseback agreements allow the government agency to cancel the lease without penalties, in exchange for a promise not to purchase replacement property and higher lease payments.
The leaseback agreement also has a disadvantage for the buyer. The original owner gets to stay on the property for the term of the agreement, as long as she does not violate the lease agreement. The landlord can't kick the tenant out so he can charge higher rent to a new tenant, or knock down a house so he can construct an apartment building that can hold more tenants.