What Is A Sale And Leaseback?
What is a Sale-Leaseback Transaction
A sale-leaseback transaction is a real estate transaction in which an owner-occupier (business) sells a commercial property and leases back that property from a buyer (real estate investor). The owner-occupier continues to use the property as before, but is now a tenant of the new owner under a commercial lease. Owner-occupiers are most common in industrial properties, but are also found in other commercial property types such as retail properties and office properties.
The primary reason for a business to sell a property it already owns, and then lease back that same property, is to raise cash for other purposes. A business might be able to put funds to more profitable use in its business than it can by owning real estate. A business may need to restructure its balance sheet and reduce its liabilities. The sale-leaseback transaction can also allow a business to access capital to expand its facilities to accommodate its growth. Finally, a sales-leaseback transaction can provide an alternative source of capital when capital markets have tightened.
Sale And Leaseback Advantages and Disadvantages
The advantages of a business having commercial real estate on its balance sheet may diminish over time, particularly in the form of decreasing income deductions. Depreciation expense of the asset may have been mostly taken. Interest expense is also reduced over the life of a loan or mortgage as principal is paid down.
Sale And Leaseback Considerations
The decision to pursue a sale-leaseback transaction requires bringing together a significant amount of professional expertise and business acumen. First, there needs to be a firm understanding of the business' cash needs, balance sheet, business strategy, and available sources and cost of capital.
Second, it is essential to have in-depth knowledge of both the investment real estate market AND the commercial lease market for the particular commercial property type the business is occupying. This is because the decision making process requires using accurate current and forecasted market variables for the comparative property ownership analysis, the investment sale analysis, and the commercial lease analysis. Commercial real estate market expertise will also be required to appropriately market the property to investors, manage the transaction process, and negotiate the commercial lease terms.
Finally, a sale-leaseback transaction has important financial, legal, and tax implications for the business. The impact of commercial real estate ownership versus a commercial real estate lease is considerably different from a financial, legal and tax perspective. Therefore, a business must bring in the appropriate advisors as part of the decision making process.