A Sale-Leaseback can be an intelligent move by operating businesses that own their real estate.
Why Should Business Owners Consider a Sale-Leaseback Arrangement?
- Unlock a company’s real estate value
- Enable a company to reduce its investment in non-core business assets, such as buildings and land
- Liberate cash in exchange for executing a long-term lease
- Keep occupancy costs at a predictable cash outflow by locking in long-term rental rates.
- Take advantage of the opportunity to sell and lease back properties when real estate values are high.
6 Key Benefits For A Sale-Leaseback Transaction
Set Your Own Lease Terms
Because the seller is also the lessee, the seller has significant bargaining power in structuring the property lease. In addition to capitalizing their investment in the real estate, the lessee has the opportunity to negotiate an acceptable lease agreement with the investor acquiring the property. Typical leases run 10 to 15 years. The seller, now the tenant, can also negotiate extension options after the lease expiration.
Retain Control of Real Estate
Most sale-leaseback agreements are structured as triple-net leases, so the tenant will be responsible for the taxes, insurance, and common area maintenance. A long-term, ‘hands-off’ lease from the investor provides the tenant similar control over the property as they had when they owned the property.
Generally, lessees that are engaged in a lease are able to write off their total lease payment as an expense for tax purposes. As property owners, the interest expense and depreciation were the only tax deductions available. As a result, a sale-leaseback may have a greater tax advantage.
Greater Value to the Real Estate
Unlike a mortgage, a sale-leaseback agreement can often be structured to finance up to 100% of the appraised value of the company’s land and building. As a result, a sale-leaseback more efficiently uses the company’s investment in the real estate asset as a financing tool.
No Financial Covenants
A sale-leaseback agreement generally contains few covenants. Fewer covenants provide a company with greater control over its own business and operations, and reduces risk in difficult operating environments.
Attractive Implied Financing Rates
A sale-leaseback agreement has an implicit financing rate (“cap rate”) embedded in the future rent payments. Although the sale leaseback cap rates are frequently slightly more than similar mortgage rates, a sale leaseback provides cash proceeds for up to 100% of the appraised value of the property versus the 65% to 75% of appraised value under a typical mortgage. A sale-leaseback investor has recourse only to the real estate as collateral and a relationship with the seller through the lease agreement. As a result, the sale-leaseback is slightly more expensive than senior financing and less expensive than mezzanine financing
How to Get Started
All sale-leaseback investors follow a disciplined approach to conducting their due diligence. Commercial NNN Lease will help you prepare the necessary evaluation of the assets with local market research, comparable lease and sales data, location data, accessibility analysis, and available financing for a potential purchaser before taking these assets out to the market for sale.