Sale Leaseback Potential Benefits
Written by Michael Houge
Flexible Lease Terms
The seller has a lot of power in sale/leasebacks to negotiate their lease. Because the seller is also the lessee, they can create a lease that is attractive to both seller as well as the investor. Normally, a lease attractive to both parties will run between 10-20 years. The seller can also create term extension options, or terms for an early termination if they foresee the need.
Greater Value to the Real Estate
A sale leaseback uses the company’s investment more efficiently, because they can be structured to finance the full appraised value of the company’s land and premise.
Capital for Growth
A sale leaseback positions the seller to be able to use more of their assets. With this sale option, the seller can purchase additional facilities, technology and equipment, buyout a shareholder, a special cash distribution to shareholders, or to simply prepare for retirement. Additionally, sale leasebacks can be used as an off-balance finance sheet that assists in turning a non-earning property asset into growth capital. Many businesses do not have this option without a sale leaseback because of the tightening credit markets, so sellers are able to save the bank financing for future endeavors. Sale leasebacks provide business owners with heightened flexibility on the best use of their company’s cash.
Retain Control of Real Estate
Most sale leasebacks are structured as absolute, triple-net leases. This means that the tenant is responsible for the taxes, insurance, and normal operating expenses that they were responsible for when the property was user owned. A long term, ‘hands off’ investor provides the seller the opportunity to maintain complete control over the property which is why this option is so attractive for the seller. The investor and the seller can work together to create options for future expansion or sublease of the property, but the business owner maintains a similar level of property control as when they owned the property themselves.
No Financial Covenants
Because of the lease and sale structure, there are less ordinances that restrict the business. The company has an elevated level of control over their own operations. A sale leaseback rarely includes any type of personal guarantee.
Corporate Restructuring/Exit Financing
If a company is struggling to pay their creditors, then they may be considering declaring bankruptcy. Business that are struggling financially may want to consider a sale leaseback for a rapid increase of capital, which may not only solve their equity problems but also will assist the company in financial reorganization. If the business can provide good historical financials and a projection of future financials based on a solid business model, then investors may be able to jump in quickly. With the assistance of an investor, the business has the financial freedom to make many changes within their business.
Potential Tax Savings
Another benefit of a sale leaseback is the tax savings for the business. In general, the lessee engaged in a lease can write off their entire lease payment as an expense for tax purposes. Whereas, as the property owner, the only tax deduction available is the interest expense as well as depreciation.
Attractive Implied Financing Rates
Cap rates or written in financing rate are imbedded within future rent payments in a sale leaseback, and while they are typically slightly higher than normal mortgage rates, there are advantages to the sale leaseback. The sale leaseback provides cash proceeds for up to 100% of the appraised value of the property, while a typical mortgage will only provide cash proceeds for an average of 75% of the appraised value of the property. The sale leaseback investor has only the real estate as collateral and a relationship with the seller through the lease agreement.
Packaging Business for Sale
Most investment firms are not in the business of owning and managing real estate. For this reason, a business owner who is considering selling their company can benefit by taking the property out of the sales transaction, and thus maximize the value of the real estate and increase the overall gross sale proceeds. Sale leaseback investors will typically make their offer price based on an appraisal, extensive real estate market study, and a review of comparable market lease rates. This is because the full value of the real estate is not often realized, as the EBITDA multiple often does not carry market value of the company’s property. Using this, the seller can complete a sale leaseback, negotiate a long-term lease, and pull out the real estate sale proceeds or repay corporate debt before the sale of the business.
