What is a sale-leaseback?
Simply put, a sale-leaseback is a transaction in which the owner of a property enters into an agreement to 1) sell their property to a buyer/investor and then 2) lease that same property from the buyer/investor for a set amount of time (usually at least 7 - 10 years) for a pre-determined lease rental rate.
The most common type of sale-leaseback is a commercial sale-leaseback. In this type of transaction, the property is usually an office building or warehouse, although it could simply be land as well. The lease terms and rental rates can be based on a variety of factors to include seller/tenant’s determination of ‘market value’, the new buyer/investor’s financing costs as well as the seller/tenant’s credit rating and market rates of return.
The typical lease structure in a sale-leaseback is a triple net (NNN) lease or an Absolute NNN lease, which means that the seller/tenant agrees to pay all real estate taxes, insurance, and common area maintenance costs as well as any other costs that may be designated under the lease (water, gas, electric, janitorial, etc.). Under the Absolute NNN lease structure, the new buyer/investor has zero ‘landlord responsibilities’ and the seller/tenant is responsible for the replacement of roof, structure, foundation, HVAC, etc. This Absolute NNN structure can make for a great ‘coupon clipper’ CRE investment for hands-off investors.
In a commercial sale-leaseback transaction, there are only two parties who assume four different roles: 1) the seller and 2) the buyer who then become 3) the tenant and 4) the landlord respectively. Each of these roles has various pros and cons that are important to consider before entering into an agreement.
Why consider a sale-leaseback?
Increasing capital through a sale-leaseback transaction can offer property owners a number of benefits. Some of the biggest benefits for the seller/tenant include:
- Converting equity in the commercial property into cash
- Setting your own leaseback rental rates and other deal terms
- The ability to free up capital invested in real estate to instead finance business expansion projects, acquire capital equipment, reduce debt, or payback investors
- A long-term lease agreement that has rent costs locked in for the entire term plus renewal options so seller/tenant can ensure predictable, continued occupancy
- The ability to continue occupying the previously owned property and retain control of all the real estate decisions
- The ability to deduct rent payments as business expenses
Similarly, the buyer/landlord also experiences several benefits from a sale-leaseback. These include:
- The ownership of a cash-flowing asset that is backed by a long-term NNN lease
- The ability to deduct property depreciation expenses & interest payments on buyer/landlord’s income tax return
- Insulation from volatile CRE market swings
- Investment tax credits (if available)
- The opportunity to obtain a specified and consistent return on investment (ROI) with relatively low risk compared to speculative or value-addcommercial real estate transactions
Talk to the experts about a sale-leaseback transaction
Sale-leasebacks can offer excellent benefits to business owners if executed correctly. To ensure you get the maximum amount of capital, you’ll want to work with a CCIM-designated broker to help you navigate the complexities of commercial real estate transactions.
Here at Fountainhead Commercial, our experts are here to help. Contact us today to learn more.