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Companies often have significant capital tied up in real estate holdings, even when they’re not in the business of owning real estate. For companies where real estate is not their primary business, a sale- leaseback can unlock the capital tied up in real estate for more productive purposes.
What does a sale leaseback involve?
A sale leaseback occurs when an owner/occupant of real estate sells the property to a third party, and simultaneously enters into a lease to continue occupying the premises. A typical sale-leaseback transaction involves a lease that is 7 to 15 years with triple net terms, meaning the tenant retains most expenses associated with operating and maintaining the property. The seller (now tenant) retains long-term control of the property, and the buyer (now landlord) obtains an investment with a reliable cash flow.
What’s in it for the seller/tenant?
A sale-leaseback can free up capital that he been tied up in owned real estate for investment in the tenant’s core business, or for more profitable investment vehicles. Companies that are in an expansion phase also find sale/leaseback a useful tool. A sale leaseback provides a greater return of cash than a mortgage, due to the typical loan-to-value restrictions of traditional real estate financing.
A sale-leaseback can be attractive for companies that have below-investment grade credit, although the overall creditworthiness of the tenant does affect the sale price. In certain circumstances, a sale-leaseback can also have positive effects on the tenant’s financial statements, creating a lower debt-to-equity ratio. There may also be tax advantages, depending on the terms of the lease and how it is classified.
What’s in it for the buyer/landlord?
Purchasers in a sale-leaseback transaction gain a reliable stream of income and the potential to capture appreciation of the real estate value. The long term nature and triple net terms of most sale-leaseback arrangements also mean that a buyer has a reduced risk of vacancy, as well as minimized operating and management expenses.
What kind of property is right for a sale-leaseback?
Office, retail, medical and industrial properties are all candidates for a sale-leaseback. In general, the more uses a property has, the more attractive it is as an investment vehicle; purpose-built properties are of slightly lesser value.
A company should consider a sale-leaseback in the context of its overall strategic goals. The cost of alternate capital, as well as the specific tax and accounting implications of the transaction, should also be examined.
WCRE’s commercial real estate experts can provide guidance and advice to owners considering a sale-leaseback transaction, as well as local or national opportunities for those seeking sale-leaseback property as an investment.
For More Information Contact:
Anthony V. Mannino, Esq.
P: 856 857 6300
D: 215 799 6140
F: 856 283 3950
M: 215 470 6084