Leasing: Advantages and Disadvantages?
This type of operation can have advantages and disadvantages that the manager must master before making any decision.
The leader’s blog offers you the opportunity to review them in detail.
1 – THE ADVANTAGES OF LEASING
In the context of a traditional acquisition of a property, the company is obliged to make a cash outflow from the outset when it uses a loan (need for a “contribution” from the credit institution).
Leasing avoids such a cash outflow since the company only pays rents over time, the property remaining the property of the lessor until the end of the contract.
Leasing thus makes it possible to improve the company’s accounting situation by avoiding the recording of a debt (loan) on the liabilities side of the balance sheet. The leased asset does not appear on the asset side. The fact that the transaction is “off-balance sheet” may thus enable the company to preserve its borrowing capacity from banks with a view to making other subsequent investments.
Another advantage of leasing is the possibility of deducting the rents paid to the lessor from tax. Thus, the company’s tax base is reduced, resulting in a reduction in the company’s income tax liability.
2 – THE DISADVANTAGES OF LEASING
While leasing has a number of advantages, it is not a “miraculous” solution for acquiring property.
Leasing, a solution reserved for certain acquisitions
First of all, the type of property that can be leased remains limited (buildings, vehicles, etc.). This operation is therefore generally not possible for the acquisition of specific “goods”. »
Indeed, the lessor remains the owner of the property until the option is exercised. The latter must therefore be able to resell the property in the event of non-payment, hence the need for relatively “current” property.
Leasing is often a little more expensive
Secondly, leasing is generally more expensive than a traditional loan if we consider the operation as a whole (total payment of rents, administrative costs, etc.).
In addition, when the option to become the owner of the property is exercised, the company must pay a price to the lessor. When exercising this option, the taxation relating to this type of transaction must be neutral compared to a traditional acquisition. Tax reinstatements are therefore carried out.
In addition, leasing requires that the asset be retained for the duration of the contract to avoid penalties. Such a situation may therefore be detrimental when the company is faced with a sharp increase in the use of more efficient assets or, conversely, when the company is experiencing a decline in its activity requiring a less significant use of the asset.
Finally, it should be pointed out that the leased asset cannot be used by the company as collateral insofar as it does not own it (for example, it is impossible to set up a mortgage on a building to obtain a loan).
Leasing remains a suitable acquisition method for a company that does not wish to make an immediate cash outflow and intends to use the asset over a certain period of time.
Before entering into such a contract, the manager must carry out simulations to determine the most advantageous transaction to acquire the property.
Advantages and disadvantages of both financing methods
1) Classic long-term loan:
The SCI or the operating company is the owner of the property from the outset.
When the property is sold, the capital gain will be calculated from the date the property is held.
At the end of the credit, the SCI does not change the tax regime and remains taxed on the property income or on the SI if there is an option for this regime.
In the event of bankruptcy, this property, if financed via a SCI, may be resold, the balance between the sale price and the balance of the outstanding loan being returned to the SCI’s shareholders.
It can even be leased to a third party company, which will make it possible to preserve this property as a patrimony, except in the event of an extension of the bankruptcy filing to the SCI.
In the case where the investment is made directly by the company, the credit appears on the liabilities side for a significant amount. This credit, given its duration, may decrease slowly, which may affect the Company’s ability to make new borrowings as part of its operating requirements.
The financing ratio is generally limited to 80/90% of the cost of construction or acquisition. This percentage may be increased to 100% depending on the quality of the property acquired or its location.
Transfer taxes and duties are not financed.
In the context of a “translucent” SCI, a scissor effect may appear between the 7th or 8th year. At that time, the share of deductible financial interest decreases significantly, which has the effect of increasing taxable profit. The partners thus find themselves having to pay higher property income taxes when they have not received the equivalent cash, which is used to pay the capital portion of the loan. It is therefore important to have a high rental profitability in order to limit this effect.
It is also possible to opt for the IS, knowing that this option, which can be exercised at any time, is definitive.
Additional guarantees (partners’ guarantees) are often requested, which implies that the partners have a solid financial base.
Mortgage costs are borne by the company or the SCI (about 1% of the price) and are not financed.
2) Real estate leasing:
Leasing is a financial commitment recorded off-balance sheet, if the investment is made directly by the company, which does not affect the balance sheet structure in terms of financial commitments.
Financing is 100% secured, with fees and charges generally incorporated into the leasing base.
The rents are fully deductible at the time of the land share.
Additional guarantees are limited (guarantee of 1 to 2 years’ rent including tax).
Under a maximum 12-year contract, there is no obligation to publish the lease agreement, resulting in savings equivalent to the cost of a mortgage guarantee.
The transfer duties (4.80%) at the end of the contract relate to the residual value at the end of the contract. This residual value is generally very low (€1).
Leasing offers less flexibility than traditional credit as the company only owns the property after exercising the purchase option (residual value).
It is possible to anticipate an early exercise of the option around the 8th year in general.
In the event of bankruptcy, the rents paid are definitively lost.
At the end of the leasing contract, there is an obligation to reinstate, in addition to the land, the difference between the financial depreciation (maximum 15 years) and the tax depreciation (20 to 25 years depending on the type of asset financed).
This reinstatement has the effect of increasing the tax base upon exercise of the option, this reinstatement being recorded as “extraordinary income”.
In order to limit the impact of this measure it is possible to amortize 95% of the price of the property over 12 years and 5% until the 15th year. The reintegration will concern 5/20ths of the original value of the property, resulting in a tax saving.
However, the contract must be published and in the event of bankruptcy between the 12th and 15th years, the rents paid will be lost.
At the end of the leasing contract, the “translucent” SCI no longer sub-leases the asset but leases it directly to the operating company.
It changes its tax regime from BNC to property income.
This change of regime is equivalent to a transfer, and the SCI must recognize the capital gain between the original price of the property and its market value when the option is exercised.
This so-called “unrealised” capital gain will be recognised but will only be paid when the property is sold or transferred.
The IS option avoids the recognition of this unrealised capital gain, as the SCI retains the same tax regime at the end of the leasing contract. But this option at the IS will have an impact on the calculation of the capital gain in the event of a sale.