Regain Your Balance with a Sale Leaseback

Due to a sluggish economy many companies are experiencing a shortage of cash. For companies that own the property on which they do business though there may be no better way for them to generate an infusion of cash than a Sale Leaseback Transaction.

The Sale Leaseback is a financing technique that has been around since the 1940's. Sale Leaseback transactions provide an alternative means of ownership, investment, financing and risk allocation The transaction, in short, is one in which a company sells the property it currently owns and then occupies it as a tenant. The lease is typically a long-term Net Lease, with the Seller/Tenant perhaps having the option of repurchase at a later time. A typical lease under a Sale Leaseback agreement is at least 15 to 20 years with renewal options. This allows the business owner to occupy and maintain use of the property over the long term and is valuable to an investor because they in turn get a property with a stable tenant.

From the Seller/Tenant perspective there are key advantages to a Sale Leaseback transaction the primary of which is the conversion of a non-liquid real estate asset to cash while retaining control and utilization of the property. This sudden cash infusion can then be invested back into a company, used to reduce debt load, or applied to alternative investment strategies. It also contributes to the lowering of the debt-to-equity ratio which makes the Seller/Tenant more appealing to banks, shareholders, and lenders. The sale of the property removes it from the balance sheet and frees up cash which prevents a corporation from having to turn to short-term borrowing options.

The Seller/Tenant has strength in dealing on a leaseback and can use that to negotiate the amount of the rent by offsetting the sale price. The Seller/Tenant is now also allowed to deduct the full amount of the lease payment for tax purposes. Though the Seller/Tenant retains long-term use of the property they give up many of the benefits of ownership. Primarily, all future appreciation of the land is lost and the Seller/Tenant doesn’t own the property at the end of the lease.

From the Buyer/Landlord perspective the Sale Leaseback has long term bond-like characteristics. They typically provide a stable and predictable cash flow and act as a moderate hedge against inflation. Being that this type of transaction typically involves a single tenanted location they have lower volatility than multi-tenanted property investments. Additionally, a long-term lease minimizes the frequency of vacancy, decreases the cost of commissions and tenant improvements, and protects against downside exposure in a weak real estate market. It is important though to remember that the Seller/Tenant has the upper hand in negotiations which usually results in the selling price or the rent falling in the seller’s favor, and quite often both.

Sale-leaseback transactions are actually more common than many would think. Often the thought of publicizing a potential sale-leaseback opportunity frightens businesses as they don't want others in the community to know that they selling their property. Since it’s possible the sale could be misinterpreted as an indicator of a businesses’ financial instability a businesses will allow a one time showing or an off the market deal with an investor to avoid such public analysis.

Sale Leaseback opportunities are out there and all it takes to find them in initiative. Locate all the owner occupied properties in the area and contact them by phone, in person or by mail. Whichever method you use, act quickly before another agent gets there before you.