A sale leaseback option is a means of stimulating your business by improving cash flow while not interrupting your current daily operations. In a sale leaseback arrangement, the seller leases out the property they occupy immediately after selling the property to someone else. It frees up capital that was tied up in their CRE asset while preserving the resources that are critical to everyday operations as a business.
How a Sale Leaseback Benefits CRE Investment Property Owners
The beauty of a leaseback for a seller lies in their ability to improve financial stability by freeing up assets so they can continue growing their business in the same location. In a nutshell, the benefits of sale leaseback transactions include:
1. Generates immediate cash flow for the seller
The immediate cash a seller receives from a sale leaseback strengthens their business finances.
2. Creates an alternative current financing for the seller
When sellers choose to create a sale leaseback agreement, one perk is that they avoid the need to refinance and skip some of the costs that accompany traditional financing such as appraisal fees. Sale leasebacks may give buyers the opportunity to purchase with a decreased interest rate, which may convert into favorably decreased rental rates for the seller. If a seller signs a lengthy lease, they can cash in on possible decreased rental rates and give their business a greater opportunity to succeed.
3. Transfers ownership to the buyers
The sale leaseback agreement frees up the CRE property’s sellers to focus on growing their current business without the added responsibility of owning the building in which it operates.
4. Improves the balance sheet of the seller by displaying a decreased amount of financing
A sale leaseback exchanges a fixed asset—the building—for a current asset, such as the cash the seller receives in a sale leaseback. The seller’s rent is not a liability, so the ratio of current assets to current liabilities improves. When the business’s ratio increases, it looks more appealing to lenders for future business loans.
Frequently Asked Questions About Sale Leasebacks
How does the agreed upon lease term impact the sale price of the CRE?
The purchase price and lease rental rates are strongly connected to each other. The longer the lease term, the higher the sale price of the commercial real estate property. If a seller agrees to a long-term lease, it will typically increase the price the buyer will agree to pay for the property. Likewise, if a seller agrees to only a short-term lease, the selling price will likely decrease. With a short-term lease, the buyer wouldn’t be guaranteed cash flow for a significant time period; therefore the purchase price would be reduced to offset the risk involved.
What does a sale leaseback agreement look like?
A sale leaseback agreement looks a lot like a typical purchase offer, except for the fact that it contains a clause in it that outlines the conditions of the purchase: conditional upon both the seller and the buyer agreeing to implement a lease. The lease is typically attached to the sale leaseback agreement.
What does a lease for a sale leaseback look like?
A lease of a sale leaseback looks the same as a regular lease. Apart from any specific outstanding buyer and seller conditions, when a seller signs the lease, their signature makes the sale leaseback binding. As with any lease, it’s wise to examine the details it outlines before adhering to them.
Why do business owners choose to do a sale leaseback?
If the seller needs to free up capital from being tied up in commercial real estate equity, a sale leaseback may be a wise option to consider. When a business struggles to meet obligations, a sale leaseback can bolster cash flow and keep the business going.
What type of shift should sellers be prepared for when doing a sale leaseback?
Understandably, there are positional and paradigm shifts for the seller—from the position of being an owner to being a tenant who occupies the building he owned. But the benefits of infusing the seller’s business with cash flow in a sales leaseback situation can outweigh the risks.
What is the best way to maximize the sale price as a seller in a sale leaseback transaction?
The answer to this depends on the length of time for which a seller is willing to sign a lease, and the rental rates the seller perceives are acceptable. Buyers look at the length of time they are assured a stability of cash flow based on the length of the lease the seller is willing to accept. The longer sellers are willing to sign a lease, the more attractive the opportunity is for buyers.
It can be a tough decision to transition from being an owner to a renter by making the decision to sell a commercial property and lease it back. But the benefits can help sellers get out from under the financial responsibilities that come with owning a building, and focus on growing their business. Just ask the New York Times, who sold and leased back their headquarters in 2009. They needed to pay down their debts and increase their cash cushion during a slump in the newspaper industry.
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