No matter how great a property is, sometimes a business even owns a valuable property first but still requires cash for growth, equipment purchase, or just simply to pay debts and day-to-day operations. Selling you could get money but, you lose ownership/disrupt the business.
Another option is a sale leaseback real estate. The company sells its property to an investor and rents it back. It enabled the company to secure capital, all while continuing to enforce its operations from their current physical location.
The Basic Idea is Simple
Let’s take a company that has a warehouse.
The company sells the warehouse to somebody. Instead of relocating its operations, it takes out a lease with the new owner, and remains in the building.
It creates two different relationships out of the box:
Seller → Selling the property and receive Money
New owner → Earn rental income on the lease
This layout can apply to offices, warehouses, industrial properties, retail buildings, and other commercial real estate.
Why Would a Business Sell Its Property?
The main attraction is capital access.
Real estate could mean a muted zero sum. A sale leaseback can realize part of that value as cash without needing to move the business.
The capital might be utilized for:
- Business expansion
- New equipment
- Debt reduction
- Acquisitions
- Working capital
- Other strategic investments
The appropriate utilization depends on the financial condition and targets of the firm.
The Business Keeps Operating
Continuity is one of the major practical benefits of sale leaseback real estate.
Staff can stay in the very same work environment. Customers can keep going to the same land. You might not need to relocate equipment, and operations.
This can be helpful for companies who rely on location to drive revenue or perform their business efficiently.
But There is a Trade-Off
By selling a building, the cash is there but the business no longer owns it.
Instead, it has become a tenant and under the new arrangement will pay leases.
It creates an ongoing cost that needs to be measured against the benefit of receiving the money from a sale.
As a result, lease terms are just as important as sale price.
Look at the Lease Before You Look at Price
A sale leaseback should not just be about achieving the highest underlying real estate price.
Businesses will need to review details such points as:
- Initial lease term
- Rent amount
- Rent increases
- Renewal options
- Maintenance responsibilities
- Property taxes
- Insurance obligations
- Termination conditions
Occasionally, a preferable lease may be better served at a net price bill of sale.
Is a Sale Leaseback Suitable for All Businesses?
Not necessarily.
The one-time extra liquidity generated by a sale leaseback real estate transaction helps, of course, but it alters the ratio between owned property and leased costs of that company.
The short-term capital benefit has to be balanced against the long-term rental obligation, as well as future requirements for property.
When arranged appropriately, a sale leaseback converts unused capital parked in property into cash for business priorities without forcing the company to move. Professional financial, tax, legal, and real estate advice is simply used to determine if the structure can accomplish the goals of the business.
