In commercial real estate sale-leaseback transactions, a property owner sells real estate used in their business to an unrelated private/institutional investor or other third party. At the time of the sale, the property is leased back to the seller for a mutually agreed upon time period. It is generally structured as a 10 to 30-year triple net lease and often includes renewal options. If executed successfully, a sale-leaseback will be mutually beneficial to both the seller/lessee and buyer/lessor. All parties must give careful consideration to the business, tax advantages and disadvantages associated with this type of arrangement.
- Improves bottom line —company can focus on their core operational business resulting in potential increased returns, productivity and efficiencies.
- Seller receives 100% of property value (subject to possible capital gains tax) versus conventional financing or re-financing options with likely more favorable terms and without the associated fees and possible covenants.
- Reallocation of capital/reinvestment of sale proceeds.
- Funds available for dividends, re-purchase of stock, debt payments or financing of mergers and acquisitions.
- Conversion of non-earning assets into investment capital provides flexibility and often results in potential higher return on capital/profitability.
- Improves balance sheet and credit standing – eliminates asset book value and liability and replaces with cash resulting in improved financial ratios.
- Position the company to take advantage of beneficial tax treatments.
- Lease payments versus depreciation/interest deductions which may have inherent limitations, especially over time.
- Timing of gain and loss recognition including the ability to offset expiring net operating losses.
- Typically, a higher sales price is achieved in this type of transaction unlocking the property’s appreciated value while owner/user maintains occupancy.
- Can act as a deterrent to corporate takeovers.
- Loss of residual property value.
- Possible relocation at the end of the lease term.
- Potential for some loss of flexibility.
- High rental payments if market softens.
Sale-leaseback may be an excellent way for a company to continue uninterrupted use of the property while retaining certain control over the real estate that is important to its operations for the foreseeable future. It also enables the company to free up debt and equity capital to achieve some of the various advantages listed above. Generally, the possible seller advantages outweigh the potential disadvantages. While there are certain marketing and legal restraints, with the right advisers the transaction can be carried out, the value is maximized, and the company’s operational interest are adequately protected during the term of the lease.
Rob Kerr is a Senior Director at Intersection, offering expertise in both property acquisition and disposition as well as investment sales, including NNN, retail, industrial, and multi-family. Contact Rob at 619-369-2400 or [email protected]