Companies are increasingly looking at their real estate holdings as a financial tool rather than simply as a fixed asset.
Because of this, some of them are considering a Sale-Leaseback Strategy – especially where the holdings have appreciated in value – to free up cash for other purposes while retaining the use and control of the property.
There is an opportunity today for companies to monetize these assets at attractive capitalization rates to free up cash that is otherwise locked up on the balance sheet and, at the same time book, substantial gains.
Substantial tax advantages may also be achieved.
Companies with strong credit and good real estate are drawing considerable investor interest.
What is a Sale-Leaseback?
A Sale-Leaseback is a transaction whereby the owner of a property sells their facility to an unrelated private investor and agrees to lease it back on a long term triple net basis.
Leases are usually in the range of 10-15 years and become effective upon the close of escrow. The property is leased back to the seller at terms that have been predetermined to satisfy the seller’s cash-flow parameters.
Advantages – Why Would You Consider A Sale-Leaseback?
Converts a non-liquid real estate asset to cash while retaining the control and utilization of the property.
This type of business transaction allows a business owner to take the equity out of appreciating real estate and use it for other purposes.
Many people have used proceeds for such things as providing working capital to expand their core business, funding retirement programs for senior executives, buying back stock, buying out a partner, or reducing debt.
If the capital tied up in real estate is applied to working capital in the business, in certain situations, it could possibly earn 15% to 30% or reduce debt that is currently costing between 6% to 12%.
2. Property Market Value
In a Sale-Leaseback, the seller receives 100% of the property’s market value while a conventional mortgage would fund no more than 70-80% of the property value or may be considerably less in today’s economic environment.
3. Reduce Debt and Clean Up The Balance Sheet
Sale of the property improves the balance sheet and credit standing by replacing a fixed asset with a current asset (cash proceeds from the sale).
If the lease is an “operating lease” the seller’s rent obligation is disclosed as a footnote to the balance sheet rather than a liability. This increases the ratio of an asset to a liability and improves the seller’s position for borrowing future funds.
4. Deductibility of Rent
The rent payments are tax deductible and to the extent that the Sale-Leaseback includes land, it puts the land on a tax-deductible basis.
5. Use of Depreciation
To the extent that the seller as the owner has used up depreciation on the improvements, conversion to the position of lessee permits continued deductions by way of rental payments.
If the funds resulting from the added tax savings are invested in depreciable equipment or machinery for use in the business, additional tax deductions are generated.
6. Protection of Lease Provisions
The seller/lessee has the same assurance of occupancy for the term of the lease that he would have if he retained ownership.
A common lease term may be 10 to 15 years with one or more additional options to renew for periods of 5 years or greater.
7. Freedom from Debt Restrictions
Often preferred stock, corporate bonds and loan agreements contain restrictions on further debt. The Sale-Leaseback may not be within these restrictions.
What Are The Tax Implications or Disadvantages?
Many factors influence the tax effects of this type of transaction.
- Your basis in the property
- The amount of debt on the property
- Amount of depreciation you have taken on it
- The advantage of being able to write off 100% of lease payments versus interest and depreciation, to name a few.
Any gain on the sale of the property is subject to capital gains tax depending on what you do with the proceeds.
We recommend you consult with your CPA to determine the tax consequences of a Sale-Leaseback transaction in your situation and the most beneficial way of structuring a lease to maximize a Sale-Leaseback for your company.
How Do You Initiate The Process & What Will Commerce Real Estate Solutions Do For You?
Our standard practice is to consult with our clients and gain a complete understanding of their needs and the property(ies) involved.
At this time, we enter into an agreement to do an evaluation of each property to determine the market value.
Then, in conjunction with the client, we determine the best way to market the property(ies) and agree on a marketing plan and time frame.
Establish The Price-Leaseback Rate
Several factors enter in this equation. Some of our clients have appraisals done prior to going to market.
In other cases, we utilize our network, market knowledge, as well as direct contact with brokers and appraisers to determine market lease rate and comparable property sales.
A lease rate is then established which will support the capitalized value of the property.
Property Analysis, Marketing Plan Development, and Implementation
We will visit the site and conduct a comparable lease and sales analysis in the market to determine an appropriate value for the property.
Using the determined market lease rate, the replacement cost of the property, comparable sales and other market information, we will offer an Opinion of Value on the property.
If a sale-leaseback is determined to be advantageous to you, once the property analysis is complete, taking a property to market would be as simple as signing a listing agreement with LINX Commercial Real Estate. Subsequent to signing, we will:
• Develop a marketing package and collateral materials including but not limited to: direct mail pieces, individual marketing flyers, internet presentations, investment proformas, due diligence packages, etc.
• Coordinate all required documentation to complete due diligence packages that include information such as surveys, environmental reports, etc.
• Implement a marketing strategy selected in conjunction with you (Ex. Individually through various real estate networks – direct marketing to institutional and industrial investors).
• Analyze all offers and recommend the best alternative to maximize your return and prove the best working structure for your business.
• Assist in negotiating the final long-term lease (leaseback) for the property, if required.
• Unless requested by the owner, typically no signage is placed at the property and prospective buyers who receive the marketing package sign a confidentiality agreement which specifically instructs them not to disturb the tenant or employees.
Depending on the particular facility a sale may take anywhere from 2 to 12 months. The time factor is not only influenced by the properties themselves, but also by the financial strength of the Seller-Tenant, current market conditions, and the intrinsic value of the real estate.