What Are The Advantages And Disadvantages Of A Sale And Leaseback?
Oct 4 2019
A sale and leaseback can be beneficial for both the buyer and seller alike, as the seller is able to receive a lump sum of cash quickly, and the buyer acquires a lower-than-market value purchase price, along with a long-term lease at an attractive yield. But, like most things in life, there are several advantages and disadvantages of a sale and leaseback.
In this post, our expert team discuss what a sale and leaseback is, and the pros and cons.
What is sale and leaseback?
A sale and leaseback is when a company looks to sell a building it both owns and occupies, while entering into a lease agreement with a buyer of the building. In other words, the original owner sells the property to a property investor, who immediately becomes his landlord.
Sale and leasebacks are usually an alternative to standard bank financing as they allow the owner/occupier of the property to free up capital that has been invested in real estate, and use the monies raised toward other more profitable and immediate uses.
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What companies and properties are suitable for sale and leaseback deals?
- Properties with a single occupier
- Properties including offices, retail and industrial
- Companies with a decent trading history and a healthy balance sheet will get a better capital sum from an investor
- Tenants who are willing to enter into leases of at least five years or more at or around prevailing market rent
Sale and leaseback advantages and disadvantages:
There are several advantages and disadvantages of sale and leaseback deals as a result, each pro and con should be considered carefully, to ensure you are making the correct decision for your business and commercial property.
The advantages of sale and leaseback
- It converts property assets into capital without the need of the occupier to lose control of the building they occupy
- It avoids costs usually associated with conventional debt financing for real estate transactions such as valuation, brokerage and bank commitment fees
- Rental payments are tax-deductible
- If there is borrowing on the asset it will remove the associated debt from the balance sheet and improve the company’s debt to equity ratios
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The disadvantages of sale and leaseback
- Any future appreciation in the value of the property is no longer available to the seller
- The company can no longer enjoy the value of the property as part of any sale of the business
- There are instances where if the property has been owned for a long period, the tax implications may be detrimental and would need to be assessed before any deal is entered
If you are looking for an extra source of cash and are considering a sale and leaseback, it is crucial to take into account the advantages and disadvantages to determine if it will work for you and your commercial property. It is also important to examine the other options available, and avoid the common pitfalls, by asking your commercial property agent and instructing the help of financial and legal advisors too.
Written by Michael Braier.
If you would like further information on sale and leasebacks, do not hesitate to get in touch with Michael from the Savoy Stewart team.