Kuanysh Company is considering purchasing a large retail location. The retail site includes a large...

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Kuanysh Company is considering purchasing a large retail location. The retail site includes a large parking lot, loading dock facilities, and a warehouse-sized store suitable for sale of both general merchandise and groceries. The retail site is in a prime location and costs $15 million. Kuanysh has arranged to borrow the entire $15 million purchase price from a local bank. When the transaction is completed, Kuanysh will have total reported assets of $65 million and total reported liabilities of $40 million. Kuanysh has been approached by a real estate company that has offered to buy the property and then lease it to Kuanysh under a long-term, noncancelable lease contract. If the lease contract is carefully designed, neither the $15 million real estate asset nor the $15 million loan obligation will appear on Kuanysh’s balance sheet. Why might Kuanysh want to enter into this lease contract rather than simply borrowing the money and buying the location itself?

David · Accepted Answer

The arrangement as shown in the case is known as sale and leaseback. There are many 
advantages for this arrangement: 
 This allows a company to operate in an environment working with some assets that they 
do not own.

Kuanysh Company is considering purchasing a large retail location. The retail site includes a large parking lot, loading dock facilities, and a warehouse-sized store suitable for sale of both general...

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