Leasebacks

Introduction to Leasebacks

A leaseback is a legal tool that governments can use to lease acquired properties to their original owners to generate revenue or a third party to reduce maintenance costs. A government compensates a property owner for purchase of the land and then leases the property back to the former owner, now the lessee, who pays rent (either monetary or in-kind) to the government as lessor. In exchange for rent, the lessees can use their property according to the terms and conditions on the lease, but no longer own it. Leasebacks can also be one option for governments to assign land management to a third party private or nongovernmental entity without permanently transferring ownership.  

Leasebacks can be structured in different ways, including the following common forms: 

• Triple net leasebacks: A triple net leaseback is a specific type of lease where the lessor is not responsible for any of the costs or services associated with the property, including the costs of maintenance or improvements, except those required to ensure a decent, safe, and sanitary condition.^{See footnote 1} For this type of leaseback, the lessor purchases a property (generally at fair market value) to compensate the homeowner and the lease period begins at closing. The lessor’s limited legal obligations are reflected in a reduced rent price for the lessee. The amount of monthly rent charged can be based on the market rate in an area minus the average costs of maintenance incurred by the lessee. While lessees are often the original property owner, properties can be leased to others as well (e.g., a temporary renter). 

• Orphan parcel leasebacks: Orphan parcel leases occur when a property owner is willing to maintain a bought-out property in exchange for a lease allowing exclusive use of the property. Lessees provide in-kind services in exchange for the use of a property and are not charged any monetary rent.

A government’s ability to use leasebacks may depend on the sources of funds it uses to acquire a property. For example, the Federal Emergency Management Agency must approve leases and transfers of title for buyouts funded by its Hazard Mitigation Assistance Grant Programs, where full title can only be transferred to another public entity or conservation nonprofit (i.e., not private entities).^{See footnote 2}  Governments should consult funding requirements that may affect their ability to enter into a certain type of leaseback or how a lease may be structured or drafted. 

Leasebacks in a Managed Retreat Context

Leasebacks provide governments with a more flexible means to acquire vulnerable properties for hazard mitigation or eventual open space purposes by meeting private landowners’ present needs. Similar to life estates, leasebacks can encourage property owners to participate in buyouts by offering them a limited amount of time in their homes to facilitate easier transitions to new ones. For example, Charlotte-Mecklenburg Storm Water Services in North Carolina has used leasebacks with elderly homeowners or people who need additional time to purchase new homes. Leasebacks can increase participation in buyouts but should be integrated into an overall acquisition program to avoid checkerboarding. They should be used on a case-by-case basis and may not always be a prerequisite to facilitate participation in buyouts. Alternatively, leasebacks may not be a viable option if imminent physical risk or damage precludes buyout participants from living in their homes any longer than necessary. 

Furthermore, some landowners may not be incentivized to participate in leasebacks. People’s homes are often a huge component of their personal net worth and may play a large role in their long-term estate planning, inheritance, and retirement. While leasebacks might be appropriate for some property owners in certain circumstances, they may not be feasible for others who are counting on long-term ownership of their property and increasing property values as a part of their overall financial wellbeing. 

To effectively help people relocate out of harm's way and protect environmental resources, decisionmakers will need to carefully consider the terms and conditions of leasebacks based on future sea-level rise, flooding, and land loss projections to ensure that people are not allowed to stay on a parcel beyond its safe use or time span. For example, leases could expire after a standard, reasonable period of time (e.g., a few months to one year) or include “triggering” conditions that require a lease to end when forecasted physical impacts manifest (e.g., a property is damaged beyond a certain threshold or after a specific number of flood events occur, the mean high tide line migrates to a given point on a lot). 

Governments can also evaluate the use of orphan parcel leasebacks after buyouts occur to help reduce or offset some of the administrative and economic costs associated with maintaining properties as open space in perpetuity. This type of leaseback can also provide benefits for individual lessees (e.g., rights to use surrounding properties) and promote local community and environmental stewardship. Similar to triple net leasebacks, governments should also carefully craft the terms and conditions of orphan parcel leasebacks to ensure that potential property uses do not violate funding requirements or interfere with the long-term objectives for flood risk reduction and open space conservation.

Policy Tradeoffs of Leasebacks

Practice Tips

When implementing leasebacks in a managed retreat context, decisionmakers may consider the following practice tips to address and balance different policy tradeoffs: 

• Consider using multiple types of leasebacks: Governments should evaluate different types of leasebacks, like triple net and orphan parcel leasebacks, before and after buyouts to achieve different but complementary purposes. 

• Evaluate potential funding sources: Like voluntary buyouts, governments will need to compensate property owners upfront for leasebacks. Accordingly, governments will need to identify potential funding sources and requirements imposed by those sources. In particular, governments should assess whether federal hazard mitigation funding regulations place any restrictions on the use of leasebacks, or if alternative state and local sources are needed. 

• Develop a leaseback policy: Governments should consider developing general policies for leasebacks. For example, a policy could include decisionmaking criteria for how and when a buyout agency should offer leasebacks to participants. Criteria could also include standard lease terms and conditions that are compatible with objectives for hazard mitigation, conservation, and legal and regulatory requirements. Leaseback policies can also accommodate individual participant needs and circumstances and enable agencies that are administering buyouts programs to implement leasebacks more consistently and fairly. 

• Draft the terms and conditions of leasebacks to balance both a property owner’s needs and environmental benefits: As part of any general policies or operating guidelines, governments should consider how to draft leasebacks in ways that balance a property owner’s short-term or present needs with long-term objectives to reduce risk and achieve environmental benefits. By working directly with residents, governments can identify opportunities to couple leasebacks with buyouts to simultaneously improve the well-being of affected residents and their broader communities.

• Prepare for becoming a landlord: Government agencies that do not already own or manage publicly owned buildings or properties should familiarize themselves with the administrative and legal responsibilities in their state for becoming landlords or lessors. In particular, federally funded land acquisitions require landlords to comply with a number of regulations and procedures for drafting leases.