TAX RULES AND THE SALE AND LEASEBACK OF CORPORATE REAL-ESTATE

This study examines the effect of the sale and leaseback of corporate real estate on the stock prices of ?he selling firms. We ask whether t he Tax Reform Act of 1986 (TRA 1986) had a negative impact on the mark et 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 recov ery life for the lessor and to the marginal ordinary income tax rate o f 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 rate s of the lessor and the corporate lessee have an ambiguous effect on t he equity value of the corporate lessee. Nevertheless, results of simu lation analyses suggest that the relationship between the net present value of the lessee and each of the tax rates of the lessor and corpor ate lessee is negative. The empirical evidence suggests that subsequen t to TRA 1986, the lessee's benefits associated with sale and leasebac k transactions have decreased.