Sale-leaseback transactions have experienced record activity in recent years. But what exactly is a sale-leaseback—and what’s the draw? Sale-leasebacks are multi-faceted and involve a myriad of intricacies. Today we will delve into this complex but important topic in the first of a four-part series that explores its advantages and disadvantages.
As the term would suggest, a sale-leaseback occurs when the owner of a building sells a property they currently occupy to an investor, then leases that space for an extended period of time. In essence, the seller becomes the lessee, and the purchaser becomes the lessor.
What are the upsides? Let’s look at it from the seller’s vantage point:
Frees up capital:
By turning a non-liquid asset into a liquid asset (cash), a sale-leaseback frees up capital for the business. Owning a building that has appreciated in value is great—but that value is sitting in the building. If you refinance it, you’ll only get 65 to 80 percent of the building’s value, whereas selling it will get you 100 percent. (Note: this scenario does not take any existing mortgages on the property into account.)
With the sale-leaseback, the seller can now take the monies received and reinvest it into its core business—which for most businesses is a better use of cash than real estate appreciation. At the same time, it allows the seller to stay in the building—so they don’t have to deal with the hassle or the expense of relocating operations.
Benefits your balance sheet:
In a sale-leaseback, the seller replaces a fixed asset (the real estate) with a current asset (the cash proceeds from the sale). Plus, the line item for rent is only reflected for the current year, which increases the seller’s ratio of current assets to current liabilities. A higher ratio may help the seller obtain short-term financing at better rates.
Additionally, many companies have restrictions on borrowing additional funds based on prior agreements. However, because rental payments usually aren’t considered debt, a sale-leaseback would prevent the company from violating those previous agreements. What’s more, by selling a property and leasing it back, the seller could potentially thwart a takeover that was based on undervalued real estate.
Helps with taxes:
There are many tax advantages to the seller in a sale-leaseback. But as a real estate broker, not a CPA, I’ll only delve into one today: deductions. When you rent a building, you can deduct the cost of the rent. But when you own, only the mortgage interest and real estate taxes can be deducted.
As with all situations there are also disadvantages to doing a sale leaseback. I’ll cover that in the next installment.
For more information on how a sale-leaseback transaction might benefit your organization, speak to your real estate broker and accountant. In the meantime, stay tuned for our next topic, which will detail the disadvantages to the seller.
If you have any questions, please feel free to contact me at firstname.lastname@example.org.