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Tax Rules and the Sale and Leaseback of Corporate Real Estate

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Author Info
Jaime R. Alvayay
Ronald C. Rutherford
William S. Smith
Abstract

This study examines the effect of the sale and leaseback of corporate real estate on the stock prices of the selling firms. We ask whether the Tax Reform Act of 1986 (TRA 1986) had a negative impact on the market valuation effects of corporate sale and leasebacks. The results of the comparative statics analysis predict that the net present value of the lessee should be negatively related to the tax depreciation recovery life for the lessor and to the marginal ordinary income tax rate of the marginal holder of commercial mortgage debt. However, it should be positively related to the marginal tax rate of the equityholder of the corporate lessee. Changes in the marginal ordinary income tax rates of the lessor and the corporate lessee have an ambiguous effect on the equity value of the corporate lessee. Nevertheless, results of simulation analyses suggest that the relationship between the net present value of the lessee and each of the tax rates of the lessor and corporate lessee is negative. The empirical evidence suggests that subsequent to TRA 1986, the lessee's benefits associated with sale and leaseback transactions have decreased. Copyright American Real Estate and Urban Economics Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00664
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Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 23 (1995)
Issue (Month): 2 ()
Pages: 207-238
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Handle: RePEc:bla:reesec:v:23:y:1995:i:2:p:207-238

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  1. Chris Manning & Stephen E. Roulac, 2001. "Lessons from the Past and Future Directions for Corporate Real Estate Research," Journal of Real Estate Research, American Real Estate Society, vol. 22(1/2), pages 7-58. [Downloadable!]
  2. John B. Corgel, 1997. "Property-by-Property Valuation of Publicly Traded Real Estate Firms," Journal of Real Estate Research, American Real Estate Society, vol. 14(1), pages 77-90. [Downloadable!]
  3. Fayez A. Elayan & Thomas O. Meyer & Jingyu Li, 2006. "Evidence from Tax-Exempt Firms on Motives for Participating in Sale-Leaseback Agreements," Journal of Real Estate Research, American Real Estate Society, vol. 28(4), pages 381-410. [Downloadable!]
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