While banks are becoming more and more aggressive in providing new landing opportunities, bank credit is now relatively expensive. On the other hand a company’s investment in real estate is often overlooked. Many times, a corporate real estate is underutilized and is financed with a simple mortgage. And an effective alternative to mortgage financing is the sales leaseback that better utilizes a company’s real estate. Let us first understand what sales leaseback before moving on to its benefits for owners.
What is a Sales Leaseback?
Many companies do not own real estate but want the utility of land to produce their services and products. A sales leaseback simply enables a company to reduce the investment and liberate the cash in exchange for paying rent or executing a lease. A real estate sales leaseback is a transaction in which the owner of the property sells his land to special purpose investor and on the same time he leases the property back from the investor on terms agreed. In simpler words, a sales leaseback agreement lets the owner sell his land and then lease it from buyer. The actual owner becomes the renter and the third party gets the final ownership of the property.
Here are 5 Reasons why an Owner should Take Sales-Leaseback!
- Set your Own Lease Terms – The owner has significant bargaining power in deciding the property lease. Since he is also a lessee, he has the opportunity to negotiate with the investor who is acquiring the land. Typical leases are of 10-15 years. The seller who is also a tenant now can further adjust extension options after the lease expiration and also includes term for early lease termination as well. It all depends on the lessee needs.
- Retain Control of Real Estate – The one who is taking up the property for a certain period of time will be now responsible for insurance, taxes, and other expenditures like maintenance costs because most leases are structured as triple-net leases. A long term lease gives tenant a similar control over the property. The tenant can also work with the investor and include options for future expansions.
- Tax Savings – Generally, lessees are able to write off the total lease payment as an expense for tax purposes. For the property owner, depreciation and the interest expense are only tax deduction possible. In this way, a sales-leaseback ensures better tax savings.
- Greater Value to Real Estate – Unlike a mortgage, sale-leaseback is mostly structured to be financed up to 100% of the appraised value of the building and company land. In this way, the sales-leaseback utilizes the company’s investment more efficiently as a financial tool. Also, since the leaseback is technically not a financial instrument, it does not have covenants on the company.
- More Attractive Sales Offering – If you are planning to sell your property in the near future, it would attract the buyer more if there is a guaranteed major tenant than it would if the property is empty. On an average, prices are higher for sales leasebacks than traditional vacant sales.