What Is A Sale Leaseback?
By definition, a sale leaseback is a financing tool used by owner-operators across various industries. Through a sale leaseback, an owner-operator sells their real estate interests to a buyer and simultaneously signs a lease as a tenant to secure the location and operate at the property. In simpler terms, a sale leaseback occurs when you sell a property you operate out of and sign a lease with the buyer who acquires the property.
The use of a sale leaseback has become a crucial tactic for releasing hidden value and positioning a company for future expansion. This widely used financing tool enables owner-operators to release their locked-up cash and put it to better use. This capital return is fantastic for reinvesting in the company, funding expansion and additional locations, or even paying off debt.
Is a Sale Leaseback Right For You?
- Do you currently operate a business out of the building you own?
- Have you considered refinancing your property to pull equity out of the real estate?
- Are you continually looking for effective tax strategies to reduce your tax exposure?
- Do you see your business expanding into additional locations or markets in the future?
If you answered yes to any of the above questions, then it may be worth exploring the opportunities a sale leaseback will present to you and your business.
Benefits to a Sale Leaseback
(1) Improve Financial Statements
The gain realized from a sale leaseback increases liquidity and can often be amortized on the corporation’s income statements. The reported increase in earnings shows a substantial cash flow after the sale and a nominal cash outflow for rental expenses. This reduces the cash outflow levels immediately, which can help with liquidity ratios and margins moving forward.
(2) Expansion & Growth Within the Company
Regardless of the type of operation, the idea of organic growth into additional locations will forever be sought after. This spans from single-unit operators to operators with hundreds of locations throughout the country. Unlocking capital from the sale of real estate, gives the business owner the opportunity to invest in new markets and R&D to help achieve growth for the company.
(3) Capital to Reinvest
A sale leaseback allows an operator to access capital that otherwise isn’t “working” for them. Companies can use capital from a sale to reinvest back into their core business or another investment vehicle of their choosing. Groups typically receive higher returns from their current operations rather than from owning their real estate, so a sale leaseback can be a great tool to expand and grow their business.
A Sale Leaseback Provides
– Full Control of Lease Terms
– Flexible Terms
– Immediate Access to Capital
(4) Ability to Convert 100% of Equity into Cash
In most common financing scenarios, a bank will only allow you to borrow 60 to 70 percent of the equity that your property holds. A sale leaseback will enable you to receive 100% of your equity in cash which is 30% to 40% more than traditional financing. Additionally, when refinancing, a bank is typically in complete control of the terms of that deal. When you structure a sale leaseback, the operator decides the terms of the agreement, how the lease is structured, and how much they will be paying in rent moving forward. Variations in the lease term and rent can cause variances in the sale price of the real estate, but at the end of the day, the operator has full control as to what parameters are set. It’s also important to note that the new rent payments may be less than the current mortgage payments.
When traditional financing isn’t available, a sale leaseback is always an option. Sale leasebacks allow operators to gain access to cash within three to six months of deciding to sell their building.
(5) Satisfy Debt Obligations
A sale leaseback provides the opportunity for a group to gain access to cash reasonably quickly—within three to six months. This allows companies to pay down existing debt, rent, strengthen capital reserves, and immediately improve their balance sheet and cash position. A sale leaseback can be used to monetize a group’s real estate and provide much-needed liquidity.
(7) Capability to Structure Flexible Lease Terms
A sale leaseback gives an operator full control of the operations at the building while, allowing them to pull a large sum of capital out of the real estate. Leases can be structured with one to twenty year base with options to renew. A typical lease structure for a sale leaseback is a triple net lease, where the tenant is responsible for all operating expenses and taxes.
(8) Reduce Risk of Decline in Real Estate Market
By owning the real estate that they operate out of, operators are in the same risk pool as every other real estate owner in the country. The value of that building will fluctuate as the real estate market fluctuates. In most cases, the highest value of an industrial asset will be achieved through a sale leaseback.
(9) Tax Benefits
The main tax advantage of a sale leaseback is that rental payments under a lease are typically fully deductible against the company’s taxable income. With traditional financing, a group is only able to deduct interest and depreciation.
Sale leasebacks can be an excellent tool for various reasons. That said, owner-operators should take into account specific risks and considerations when negotiating any contract and lease. Working with an experienced broker and attorney can help mitigate these risks on a sale.
Sale Leaseback Updates
Sale leasebacks are gaining more traction given the current economic climate of hiked interest rates and rising inflation. As a result, corporate lenders are warier, reducing their available leverage and tightening requirements. When it comes to sale leaseback transactions, most of the time, both parties are willing to work together and conduct more realistic discussions resulting in a win-win scenario. The specifics of sale leaseback deals can be changed to satisfy the needs of both sides. This means that the seller’s desired overall value consideration can be achieved by adjusting the cap rate and rental rates simultaneously while maintaining the buyer’s initial return on the property. Additionally, due to the ongoing partnership created by this kind of transaction, some leases may be altered in reaction to market changes, as has recently been the case with recurrent interest rate increases.
Various economic benefits explain the increase in popularity for sale leasebacks.
Sale leasebacks for Healthcare
The medical office sector is one of the most resilient asset classes, making it a favorite for investors. Medical office buildings have continued to excel despite economic volatility and have exhibited a steady rise in performance since 2021. For healthcare properties, a sale leaseback occurs when a physician group that owns the property sells to a third party, like a private equity company or REIT. As MOBs continue to prosper, a sale leaseback deal can effectively reduce risk and enable owners to collect capital immediately; a crucial consideration as cap rates are expected to suffer due to the current lending environment.
Read More: 6 Reasons Why You Should Think Twice Before Taking a Direct Sale Leaseback Offer
Read More: To Lease or Own Medical Space? The Question Physicians Should be Asking
Sale leasebacks for Industrial
The opportunity to free up capital is the main justification for an owner to take part in a sale leaseback for an industrial warehouse. Any debt that is paid off with the sale of the industrial warehouse clears the liabilities side of the seller’s balance sheet. As a result, the lessee’s debt financing process will be straightforward because the debt-to-equity ratio is more desirable. With a lower debt-to-equity ratio, the business can immediately raise funds, improving the capital structure’s appearance to lenders.
Sale Leasebacks for Retail
By selling the real estate at the base of the transaction and changing their status from landlords to renters, sale leasebacks enable retailers to acquire funds without closing down outlets. On the one hand, the sale can reveal the company’s hidden value. On the other, the assumed lease adds an additional source of debt that burdens a company’s finances.
Sale leasebacks may not always be the best choice for owners or investors. Still, for some, sale leasebacks enable them to reinvest the proceeds of the sale back into their company, resulting in a significantly higher return on capital. Getting the money out of the original investment could be required if an operator wishes to add new units rapidly. A sale leaseback helps owners save costs while carrying on with their business in the location and manner they like, regardless of whether they require the funds to upgrade equipment, pay off business debt, or for various other reasons.
Takeaways
With private equity firms positioning sale leasebacks as a tool to generate higher returns, high-profile corporations are utilizing them as a financing option for expanding their business or increasing the bottom line. This year is an excellent time and economic climate to consider if a sale leaseback is suitable for your property type.
