The Disadvantages in Sale-Leasebacks

Last Updated on May 26, 2021

The past two articles I’ve written have talked about many of the advantages of participating in a sale-leaseback transaction. As with all things that have positive aspects, there are also some negative implications that one should be aware of before entering into a situation such as this. A small aside; in writing these articles I try to keep the length to about 500 words or so. Originally I was going to write about this program in two articles, but the benefits of a sale leaseback to both parties needed to be more fully explained because of the tremendous upside potential to both, that I had to separate the advantages into two distinct articles.

Not so, with the disadvantages. The negative aspects while few will be discussed below. First, the main disadvantage to the seller is that he no longer is control of his real estate destiny. The seller now has a lease in place with a definitive time frame for its termination. If there are no options to renew the lease, the seller, now the tenant will have to vacate the property. Even if there are options to renew the lease, if they’re at Fair Market Value, the seller may find itself paying far more than anticipated when the time to renew the lease occurs. The seller also may be restricted as to what it can do with the building. What approvals will they need to receive from the buyer to make additions or modifications to the building? If the seller wants to finance modifications to the building, they no longer have the building to use as collateral. Any increase in the value of the property, no longer is the seller’s; that all ends at the closing.

The biggest risk to the buyer is that the seller defaults in the payment of rent. As was noted in the earlier article, while this is certainly a risk, it’s much easier to remove a tent that defaults on a lease than to foreclose on a mortgage. Another risk to a buyer is that it needs to make sure that the tenant is paying real estate taxes and the general up keep of the building. While this too can be added into the rent to ensure that it is done, there’s an added cost to the buyer to do this. There also is a tax consideration. When the buyer is collecting rent, the entire payment is taxed as ordinary income. While if it were a loan, only the interest would be subject to tax and the not the principal being repaid. That’s a very simplistic view of the tax ramifications, and one should consult with their financial advisors. I’m a broker and am neither an accountant nor a tax attorney and as such my expertise is in the business terms of the transaction, not the tax implications.

To sum this up, sale leaseback deals are very good investments for many people on both the sale and the buy side. This like any other financial transaction should be carefully studied and surrounding yourself with knowledgeable advisors in law, accountancy, and real estate brokerage is certainly the way to go.

If you’d like more information on this subject, or have a property that you might be interested in entering into this sort of transaction, please feel free to call me at 201-848-6108 or send me an email to tillsleyr@mcbridecorpre.com.

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