Does a Sale-Leaseback Make Sense for Your Owner-Occupied Real Estate?
Because of the recent pandemic, there has been more uncertainty in the commercial real estate market. Nevertheless, there are still investors willing to provide liquidity to companies that are working to make a comeback and need cash to re-invest in the core business. Even those that received short-term relief from the government’s economic stimulus package know that their continuity depends on long-term financial security. For businesses that own their real estate, a sale-leaseback may be a solution to consider.
What is a Sale-Leaseback?
In a sale-leaseback, the owner sells the owner-occupied real estate to an investor and simultaneously signs a lease, becoming a tenant that pays rent for a designated length of time. As capitalization rates have lowered in recent years—resulting in higher property values—sale-leasebacks have become an increasingly attractive financial option.
What Are the Advantages of a Sale-Leaseback for the Seller?
Some of the major advantages of a sale-leaseback arrangement include:
- The seller converts a non-liquid asset to cash, while retaining control and use of the property
- Removes a capital asset at book value from the balance sheet and replaces it with cash received from the sale
- Allows the seller to use the newly acquired liquidity to expand business or make alternative investments
- The resultant increased net worth of the organization
- Avoids the cost and restrictions associated with the balance sheet liability that comes from placing conventional debt financing on real estate
- Provides the user/tenant the tax advantage of effectively depreciating the land, because the deductible lease payments include the use of the land and the building
- Offers the seller an exit strategy from the asset that might not otherwise be readily available
What Are the Advantages of a Sale-Leaseback for the Purchaser?
Of course, a leaseback transaction also benefits the buyer who now owns an asset with cash flow that is backed by a long-term lease. Furthermore, there is a tenant that needs the property to support business operations. Finally, the new owners now have the ability to deduct the property’s depreciation expenses on their income taxes.
What Factors Influence the Sale Price?
The sale price for a property in a leaseback transaction is based on more than just the market value. For example, a longer lease term—10 to 15 years—might motivate a buyer to offer more for the property. Also, the more responsibility you take on under the lease, the higher the sale price you will likely receive. Institutional and private investors typically prefer a Triple-Net (NNN) lease, which places responsibility for variance (typically increases) in property taxes, property and casualty insurance and maintenance on the tenant. Therefore, take the time to weigh the risks of more responsibility versus the rewards of receiving more for the sale.
Is a Sale-Leaseback Right for Your Company?
Every few months, the Federal Reserve publishes the Senior Loan Officer Opinion Survey on Bank Lending Practices. The most recent survey came out in April, stating that banks are tightening “their standards and terms significantly on commercial and industrial (C&I) loans to firms of all sizes… banks also mentioned concerns regarding the COVID-19 outbreak as having influenced their decisions to tighten lending standards.”
Considering these developments, and with plenty of private capital ready to be deployed on stabilized commercial real estate investment properties, sale-leasebacks could be a viable source of liquidity for companies striving to overcome the effects of the pandemic and achieve their business goals in the future. To find out if a sale-leaseback is right for your company, contact a commercial real estate professional today to schedule a continue-to-own versus sell and leaseback financial analysis.
The information contained in this article is general in nature and should not be construed as financial, tax or legal advice. As with any financial or legal matter, consult your tax advisor and legal counsel.