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By ALM Staff | Law Journal Newsletters |

The California Department of Corporations has issued a release designed to provide guidance in determining whether a sale and leaseback ('sale-leaseback') transaction may be a loan subject to regulation under the California Finance Lenders Law ('CFLL'). The release notes that a typical sale-leaseback transaction involves a borrower signing an agreement to sell property to a third party and then lease back that property from the third party for a charge. The borrower then agrees to pay a certain amount of money to use the property until the 'lease' expires. When the 'lease' expires, the borrower has the option of repurchasing the property. If the borrower fails to make the lease payments within a certain number of days of the due date, the lender may repossess the property, sell it, and retain the proceeds.

In response to concerns about 'unscrupulous operators seeking to evade the CFLL by disguising their transactions as sale-leaseback transactions,' the Department of Corporations has prepared a list of factors that it will use to determine whether a sale-leaseback transaction may be a loan:

  • The borrower seeks money and not the use of goods or property;
  • The borrower receives money, followed by a 'sale' of the borrower's property to the lender, with a provision for repayment in the form of rent or payments to the lender;
  • The borrower is in possession of the goods or property before obtaining money from the lender;
  • The borrower gives up title to goods or property as security in exchange for receiving money;
  • There is no risk to the lender of losing capital, other than the insolvency of the borrower;
  • The lender has the power to accelerate the principal payment of the 'loan' upon default;
  • The transaction includes agreements with provisions of title reversions and 'repurchase' within specified periods.

According to the Department of Corporations, the presence of one or more of these factors may indicate the presence of a loan transaction, despite the fact that a sale-leaseback transaction is titled or referred to as a 'lease' or a 'sale-leaseback' in the forms and paperwork. The intent of the parties and the economic substance of the transaction will ultimately be determinative. See the release at www.corp.ca.gov/commiss/rel56fs.htm.

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