What is a Sale-Leaseback on Industrial Properties?
Advantages for Buyers and Sellers
Commercial property owners may not be aware of a financing option that can improve their cash flow without interrupting daily operations: the sale-leaseback.
A definition of a sale-leaseback is a financial arrangement in which the seller of an asset is able to lease out the property from the buyer immediately after the sale is finalized. Most businesses will engage in a sale leaseback when trying to free up capital by untying cash in an asset or other investments without getting rid of the resource that is vital to operations.
While there are many motivations for engaging in a sale-leaseback agreement for both the buyer and the seller, most arrangements are made when the seller decides to improve its financial appeal and stability by freeing up assets. In leasing the asset that has just been sold, the seller is able to maintain business as usual with existing infrastructure, only making adjustments to ownership rights and access to capital.
What benefits of a sale leaseback could your company enjoy?
The common sale leaseback involves a long-term lease agreement lasting 10 years or more with options to renew. There are many reasons to participate in a sale leaseback, including boosting economic growth and opportunities in the future for the Seller. Here are the main advantages.
1. Generates Cash
The seller is able to regain access to capital that was once tied up in owning a commercial property. While the cash is freed up, the property in which the business is operating is not lost and possession is continued for the term of the lease. The amount of cash accessible from a sale leaseback is generally higher than that acquired from mortgage financing, further strengthening a business’ financial statement without affecting operations.
2. Alternative Financing
Sale leasebacks allow sellers to structure the lease term to avoid balloon payments, call provisions, refinancing or other common burdens. Through the timeline of the transaction, sellers are able to skip appraisal fees and other conventional financing costs, along with renewal options that are not always guaranteed in refinancing transactions. Sale leasebacks may also provide buyers with lower interest rates, which can translate to reduced rental payments to the seller.
3. Improve the Books
Sellers are able to replace a fixed asset with a current asset such as cash in a sale leaseback. The seller’s rent obligation is disclosed to the balance sheet, not a liability, thus increasing the ratio of current assets to current liabilities on the books. When a company’s current ratio is increased, it will shine favorably on the business’ ability to service short-term debt obligations to lenders. Improving the books with access to cash can, therefore, increase opportunities for loans in the future.
As a sale leaseback can enhance seller financials, it can also boost buyer stability.
1. Higher, Predictable Return Rate
Buyers involved in a sale leaseback transaction tend to enjoy a higher rate of return than in a conventional loan agreement. The buyer will possess any appreciation in the value of the property over the course of the lease, as well as use mortgage financing to increase return on investment. Because the lease terms span for long periods of time, there is a predictable, steady stream of income for the buyer.
2. Lease Customization
In a sale leaseback, the buyer is able to take advantage of fresh lease terms that can be customized to meet unique demands not typically found in standard leasing documents. Being able to write up specific terms with nontraditional documents enables buyers to add clauses to ensure high returns.
3. Ease of Use
Unlike buying a vacant building, a sale leaseback transaction involves extensive research into the financials of both parties. This reduces the chance of a default and maintain a secure return rate for the buyer.
To learn more of for a free consultation by one of our team members, contact us at 786-433-2380 or Email Edison Vasquez