What is a sale-leaseback?
A sale-leaseback real estate transaction refers to when a commercial property owner’s business enters into an agreement that simultaneously involves 1) selling the property to an investor-buyer and 2) the seller leasing the property back from the investor-buyer under a long-term lease agreement that does NOT require the business to relocate to a different property.
The sale-leasebacks that involve commercial real estate (CRE), can either be a single-occupant office building, industrial building, or retail building. The involved lease is most often a “triple net lease,” or “absolute triple net lease” which means that the seller to become-tenant agrees to pay for building insurance, maintenance, and real estate property taxes in addition to other costs that are designated under the lease agreement.
In commercial sale-leaseback transactions, there are typically two parties involved, who assume four different roles. These roles include: 1) the property seller and 2) the investor-buyer, who respectively become 3) the tenant, and 4) the landlord.
It’s important to note that each of these roles comes with their unique set of advantages and disadvantages. These should always be considered prior to entering a sale-leaseback transaction.
Advantages of a sale-leaseback for a seller-tenant
When executed properly, the seller-to-be-tenant stands to gain many benefits from a sale-leaseback. Some of the top advantages include:
The conversion of commercial real estate equity into cash
This is the most obvious advantage of entering into a sale-leaseback agreement. In doing so, you as business owner (and the seller) maintain 100% control of your property, per your new Absolute NNN lease agreement, while also increasing your liquidity. This fresh, new cash on your balance sheet can then be reinvested into other areas of the business such as purchasing more efficient capital equipment, opening a new out-of-state office, or any revenue-increasing play you see fit.
Increase the value of your business
It might sound strange that in order to increase the value of your company you could benefit by selling an asset. However, there’s actually a positive correlation between higher market purchase pricing and companies who use sale-leasebacks to reinvest in their business. In reality, when a corporation seeks to acquire a competitor or complementary business (such as your business), the corporation often does not want or need the commercial real estate. Under this scenario, the CRE can act as an albatross around the neck of the business.
Benefit from tax considerations
Another advantage of the seller-to-be-tenant is the possibility of benefiting from tax considerations. For example, if the subject property is fully-depreciated—and the seller-to-be-tenant had not sold the property—they wouldn’t be able to use depreciation as a tax deduction. However, after the sale-leaseback is completed, the seller-to-be-tenant’s lease payments are deductible at the building’s current basis, thus helping the seller-to-be-tenant improve the overall bottom line.
Where to find a sale-leaseback real estate expert
If you’re interested in learning more about sale-leaseback commercial real estate, give us a call at Fountainhead Commercial. Our CCIM-designated broker Lowrey Burnett and Justin Rayburn can help you maximize benefits and ensure you have more capital to reinvest into your business.
What are you waiting for? Contact us today and avoid taking out a restrictive or costly business loan while still having fresh capital to expand your business operations.