What is a Sale Leaseback?
A sale leaseback is a real estate transaction that acts as a financing tool in which an owner-operator sells their real estate to a buyer and remains the occupier of the real estate and operator of the business through a simultaneously executed lease.
Extracting 100 percent of the property’s equity, sale leasebacks allow the seller to use the liquidated capital to reinvest back into the company through financing renovations, operations, and expansions. Once the property is sold, the transaction further benefits the seller’s business with a reduction in interest expense and removes the fixed asset with its associated liabilities from the balance sheet.
Benefits for Buyers
- Brand New Lease: As opposed to most properties on the market, a sale leaseback is a way of securing a new lease beginning the moment the transaction closes.
- Customizable Lease Terms: The process includes customization of the lease, giving the buyer a sense of security.
- Invest in an Expanding Enterprise: Structured as a financing tool, sale leasebacks can expand an enterprise and increase the overall return from being a 10-unit operator to a 20-unit operator. When an operator structures a sale leaseback with the intent of renovating current locations, it shows the buyer a commitment to the location and boosts yearly sales revenue.
- Access to an In-Depth Look at the Current Operator: When purchasing a sale leaseback, the buyer will have a complete view into operator sales and consolidated company financials to make the best decision possible. Through this information, a buyer can project future sales and success, reducing the risk of vacancy.
Benefits for Sellers
- Reap the Monetary Benefits: Through a sale leaseback, an operator can turn the illiquid asset on their balance sheet to liquid capital and reinvest in their core operations. If an operator has the ability to add more locations to their portfolio quickly, they will be able to increase their yearly cash flow in a concise amount of time. Also, investing the money into renovations is a great way to jump company-wide sales 10 to 15 percent.
- Customize Lease to the Operator–Preferred Terms: Operators can customize the lease, such as setting lease terms, including rent, rental increases, options at the end of the term, and length of the lease.
- Extract 100% of the Fair Market Value (FMV) of the Property: In most traditional financing scenarios, a bank will only let you borrow 60 to 70 percent of the equity that your property holds. With a sale leaseback, the operator will receive fair market value.
- Tax Considerations: In structuring a lease with a new landlord, a franchisee has the ability to deduct any payments made to the new owner as a business expense. In these payments, an operator can shield money that might otherwise be lost in taxes paid to the government. This gives the seller the ability to reduce their tax basis and increase the bottom line dramatically.