Reasons to Consider a Real Estate Sale-Leaseback

As a business owner, you may also serve as your own landlord. While owning your property offers peace of mind, it’s wise to consider the financial potential of monetizing your real estate. This capital can be redirected towards higher-yielding ventures, such as business expansion or debt reduction. As your company grows and increases in value, selling your property may also make sense to maximize profits and separate the value of your real estate from the business.

Evaluate whether owning your property is a strategic choice or if unlocking its value will provide greater financial benefits. If the latter is the case, consider using a sale-leaseback structure to turn your real estate into a source of income while retaining operational control.

An Introduction to Sale-Leaseback Transactions

Sale-leaseback transactions have become increasingly widespread across various industries in the last 30 years, becoming a key solution for many medium-sized businesses.

In a sale-leaseback, a business sells its property to a buyer and then signs a long-term lease to remain in the building. The buyer is often a professional real estate company, who acts as a stable landlord, offering funding for upgrades and improvements. To maintain operational control, these leases are often structured as “triple net.”

Advantages of a Sale-Leaseback

One may question the advantages of a sale-leaseback structure in light of the current market opportunities. For middle-market firms, there are five key benefits to consider in a sale-leaseback transaction:

Unlocking the full value of your property

In a sale-leaseback, the seller usually receives close to 100% of the appraised value of their property, compared to a mortgage which typically yields 65-75% of the appraisal. This results in a significantly higher net cash return to the business owner.

Reallocating capital from non-core to core business operations

By executing a sale-leaseback, you can turn a non-core asset (real estate) into capital to invest in the vital and expanding aspects of your business. Planning to expand your business? Want to grow a specific product line? Looking to invest in key revenue sources? These opportunities tend to provide higher returns than maintaining ownership of the real estate.

Competitive rates compared to other alternative financing choices

Growth financing can prove costly for middle-market companies, with some mezzanine debt carrying interest rates of 10-15%. In a sale-leaseback deal, a rental payment at market rates may be lower than the amount of a loan payment. Moreover, unlike loan payments, the rental payment is usually a tax-deductible expense.

 

Flexible and tailored lease agreements

In a sale-leaseback transaction, the business owner and the new landlord collaborate to establish equitable lease terms. Both parties generally aim to have the rental rates at or below market and the lease duration, renewal options, and other conditions can be tailored to the business’ operating needs. Moreover, new landlords may offer additional funds for upgrades or expansions as part of the lease agreement.

 

Streamlining your balance sheet

With the goal of growing a middle-market business, business owners often seek ways to secure capital without over-leveraging their balance sheet. A sale-leaseback provides an opportunity to turn real estate assets into liquidity and use the proceeds to reduce liabilities and debt, streamlining the company’s financials.