This issue has three parts.
Many firms are using leasing techniques to improve performance. Leasing offers opportunities to unlock funds tied up in assets and also offers the potential to generate additional cash flows through efficient tax management. The technique of sale-leaseback was used for real estate, but the technique can also be used for other productive assets. Potential benefits of using this technique is described in an article entitled, “US-Sales-Leasebacks_UnlockingValue,” (see U.S. sale/leasebacks: Unlocking Value - CBRE United States www.cbre.us/AssetLibrary/US_Sale-Leasebacks_UnlockingValue_FINAL.pdf) by. After reviewing this article, answer the following questions:
Leasing transactions—particularly sales-leasebacks—are often labeled as balance sheet mining transactions. What does that mean?
What is the potential advantage of having a lease categorized as an operating lease instead of a capital lease?
What are the risks associated with these types of leases?