Why Participate In A Sale-Leaseback?

By Camille Renshaw, CCIM, Director of Investment Sales, Stan Johnson Co. 

Commercial property owners may not be aware of a financing option that can improve their cash flow without interrupting daily operations. A sale leaseback is a financial arrangement in which the seller of an asset is able to lease out the property from the buyer immediately after the sale is finalized. Most businesses will engage in a sale leaseback when trying to free up capital by untying cash in an asset or other investments without getting rid of the resource that is vital to operations. 

While there are many motivations for engaging in a sale leaseback agreement for both the buyer and the seller, most arrangements are made when the seller decides to improve its financial appeal and stability by freeing up assets. In leasing the asset that has just been sold, the selling company is able to maintain business as usual with existing infrastructure, only making adjustments to ownership rights and access to capital. What benefits of a sale leaseback could your company enjoy? 

Seller Advantages

The standard sale leaseback involves a long-term lease agreement lasting 20 to 30 years with options to renew. There are many reasons to participate in a sale leaseback for the seller company to boost economic growth and opportunities in the future.

1. Generates Cash

The seller is able to regain access to capital that was once tied up in owning a commercial property. While the cash is freed up, the property in which the business is operating is not lost and possession is continued for the term of the lease. The amount of cash accessible from a sale leaseback is generally higher than that acquired from mortgage financing, further strengthening a business’ financial statement without affecting operations. 

2. Alternative Financing

Sale leasebacks allow sellers to structure the lease term to avoid balloon payments, call provisions, refinancing or other common burdens. Through the timeline of the transaction, sellers are able to skip appraisal fees and other conventional financing costs, along with renewal options that are not always guaranteed in refinancing transactions. Sale leasebacks may also provide buyers with lower interest rates, which can translate to reduced rental payments to the seller. 

3. Improves The Books

Sellers are able to replace a fixed asset with a current asset such as cash in a sale leaseback. The seller’s rent obligation is disclosed to the balance sheet, not a liability, thus increasing the ratio of current assets to current liabilities on the books. When a company’s current ratio is increased, it will shine favorably on the business’ ability to service short-term debt obligations to lenders. Improving the books with access to cash can, therefore, increase opportunities for loans in the future. 

Buyer Advantages

As a sale leaseback can enhance seller financials, it can also boost buyer stability.

1. Higher, Predictable Return Rate

Buyers involved in a sale leaseback transaction tend to enjoy a higher rate of return than in a conventional loan agreement, while avoiding state usury laws that may limit the rate of interest charged for financing. The buyer will possess any appreciation in the value of the property over the course of the lease, as well as use mortgage financing to increase return on investment. Because the lease terms span several decades, there is a predictable, steady stream of income for the buyer.

2. Lease Customization

In a sale leaseback, the buyer is able to take advantage of fresh lease terms that can be customized to meet unique demands not typically found in standard leasing documents. Being able to write up specific terms with nontraditional documents enables buyers to add clauses to ensure high returns. 

3. Ease of Use

Unlike other real estate investments, a sale leaseback makes it easy to handle a seller default as the buyer can terminate the lease and evict the seller. A sale leaseback transaction involves extensive research into the financials of both parties, however, making the chance of a default slim and increasing a secure return rate for the buyer.

The benefits of a sale leaseback are enjoyed by both participating entities. The seller gains access to cash quickly, while the buyer typically acquires the asset at a fair market value and a long-term lease at a premium rate. The transaction provides a valuable investment tool that is low risk once the seller has been approved for the agreement. In a sale leaseback, the asset is of less importance than the stability and growth potential of the seller company itself. Buyers are making an investment in the future success of the seller business, enabling the transaction through the transfer of asset ownership.