Tax Rules and the Sale and Leaseback of Corporate Real Estate

Alvayay, Jaime R.; Rutherford, Ronald C.; Smith, William S.

doi:10.1111/1540-6229.00664

Cited by 24 publications

(16 citation statements)

References 11 publications

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“…While the signs of other potential explanatory variables are consistent with expectations, none are statistically significant or alter our primary findings. In particular, our results are consistent with the findings of Alvayay, Rutherford and Smith (1995) that the tax benefits of sale and leasebacks may have been reduced by changes in the U.S. tax code relative to the environment which prevailed during the early to mid-1980s. The longest leasebacks in the sample exhibit behavior consistent with our prediction for true financial leases, but we are unable to explain the significantly negative returns to lessee firms who enter into leasebacks for between 15 and 25 years.…”

Section: Discussion Of Resultssupporting

confidence: 90%

“…Financial economists have offered several additional explanations for why financial contracting influences firm value. In particular, Myers, Dill and Bautista (1976), Lewellen, Long and McConnell (1976) and Alvayay, Rutherford and Smith (1995) hypothesize that the wealth effects of sale and leasebacks that utilize financial leases differ from stock price reactions to debt announcements because of the tax consequences of sale and leasebacks. When buyers and sellers have different tax rates and abilities to utilize asset depreciation allowances, sale and leasebacks allow parties to generate wealth gains by expropriating wealth from the government.…”

Section: Related Literaturementioning

confidence: 99%

“…Changes in tax laws during the late 1980s and early 1990s may have reduced the tax advantages of sale and leasebacks. Alvayay, Rutherford and Smith (1995) examine a set of real estate sale and leasebacks from 1982-1989. They predict that tax changes in the Tax Reform Act of 1986 had a negative impact on the tax benefits of sale and leasebacks, and their event study found supporting evidence.…”

Section: Related Literaturementioning

confidence: 99%

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The Wealth Effects of Sale and Leasebacks: New Evidence

Fisher¹

2004

Real Estate Economics

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This paper investigates the phenomenon of sale and leasebacks as one way in which firms may use financial contracts to rearrange their organizational architecture. A theoretic model links the length of initial leaseback period to incentives to make noncontractible future investments in the lease relationship and predicts that firms choose shorter leases when landlords make relatively important investments. Using a sample of 71 sale and leaseback events from the 1990s, we document a significant mean abnormal return of 1.3% for shareholders of seller/lessee firms announcing relatively short leasebacks. The evidence suggests that firms may use sale and leasebacks to optimize their claims to real estate. Copyright 2004 by the American Real Estate and Urban Economics Association

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Section: Discussion Of Resultssupporting

confidence: 90%

Section: Related Literaturementioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

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The Wealth Effects of Sale and Leasebacks: New Evidence

Fisher¹

2004

Real Estate Economics

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“…Alvayay, Rutherford and Smith (1995) use a similar type of partial equilibrium wealth-maximizing model in examining the effect of the Tax Reform Act of 1986 on the equity value of the seller/lessee in a sale-and-leaseback of corporate real estate. We should also note that, unlike a numerical procedure (alone), use of a "closed-form" model permits (a) derivation of extent of lender participation without resorting to an iterative process and hence (b) evaluation of the partial, as well as total, derivatives used in formal comparative statics analysis.…”

Section: Notesmentioning

confidence: 99%

A Theoretic Analysis of Extent of Lender Participation in a Participating Mortgage

Alvayay

Harter

Smith

2005

Rev Quant Finan Acc

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A participating mortgage is a loan in which a lender accepts a below-market coupon rate in return for a share (participation) in the cash flows generated by income-producing real property. The cash flows provided by participation are classified as contingent interest and are intended to compensate the lender for additional risk exposure as well as the reduction in coupon rate. In this paper, we present a partial equilibrium wealth-maximizing model to estimate the extent of lender participation and an analysis of the factors affecting it. The results of formal comparative statics analysis show that the lender's percentage participation is, in general, positively related to changes in the loan-to-value ratio and threshold cash flows above which participation is payable. Among yet other results, a change in the contracted loan life has an ambiguous effect on the lender's percentage participation. Then, in an effort to resolve ambiguities in the comparative statics results, we employ a numerical procedure in conducting sensitivity analyses. This allows us to estimate percentage participation levels, and their elasticities, under various assumptions regarding the underlying factors. Copyright Springer Science + Business Media, Inc. 2005participation, wealth-maximizing, partial equilibrium, elasticity, contingent interest, comparative statics, numerical procedure,

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“…Despite real estate's importance in the production processes of many firms, empirical investigations into the effects of owning or controlling real estate via long-term leases are limited (e.g., Rutherford 1990;Alvayay et al 1995;and Seiler et al 2001). Moreover, the existing empirical literature has focused on the effects of special events such as large real estate sales or sale-leasebacks of real estate assets (e.g., Slovin et al 1990;Fisher 2004).…”

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confidence: 99%

Real Estate Ownership, Leasing Intensity, and Value: Do Stock Returns Reflect a Firm’s Real Estate Holdings?

Ling

Naranjo

Ryngaert

2010

J Real Estate Finan Econ

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Little is known about the effects of real estate ownership and leasing on the stock return characteristics of public firms. In this study, we first examine the sensitivity of retail firm returns to a real estate factor over the period 1998-2008. The retail industry is chosen because of the significant use of real estate in a typical retail firm's production function. Consistent with our expectations, retail stocks exhibit positive real estate risk exposure, even after controlling for sensitivity to general market risk as well as other standard risk factors. The second part of our analysis examines whether the intensity of real estate ownership and the use of offbalance operating leases to finance real property holdings are reflected in the market and real estate betas of retail stocks. We find that greater use of off-balance sheet operating leases is associated with higher market betas. In fact, the use of operating leases appears to have a larger impact on sensitivity to market risk than does the use of on-balance sheet debt. Our findings also confirm our hypothesis that real estate intensive firms display significantly greater exposure to a real estate factor. Moreover, our results strongly suggest that investors are fully aware of the risk associated with off-balance sheet operating leases.

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Tax Rules and the Sale and Leaseback of Corporate Real Estate

Cited by 24 publications

References 11 publications

The Wealth Effects of Sale and Leasebacks: New Evidence

The Wealth Effects of Sale and Leasebacks: New Evidence

A Theoretic Analysis of Extent of Lender Participation in a Participating Mortgage

Real Estate Ownership, Leasing Intensity, and Value: Do Stock Returns Reflect a Firm’s Real Estate Holdings?

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