JANUARY 2, 2019 | THE PALOMAR GROUP
What is a Sale Leaseback?
A sale-leaseback is when a property owner sells their asset and leases it back from the buyer. In most cases, sale leasebacks are 10 to 30 years and triple net (NNN) leases. A triple net lease means that the tenant is responsible for property taxes, insurance, and maintenance. Sale leasebacks usually include tenant renewal and repurchase options at the end of the lease.
Benefits for Sellers
Sale leasebacks are beneficial to companies that are not in the business of owning real estate but still need property to conduct business. It is a way for the seller to regain cash that is tied up in real estate. This allows a company to reduce its investment in non-core assets and use the cash to fund growth and other aspects of their business. The seller is still able to use the property, and they can structure the lease in a way that works best for them.
The amount of cash that the seller receives in sale leaseback is usually higher than they would get from taking out a mortgage on the property. Sale leasebacks do not have balloon payments, call provisions, refinancing or other issues that come up with conventional loans. Also, sellers do not have to pay appraisal fees, underwriting costs, and other standard financing costs. The balance sheet becomes more liquid as the fixed asset turns into a cash. If structured properly, a sale leaseback can more efficiently use a company’s assets as a financing tool.
Benefits for Buyers
The buyers for a sale leaseback are real estate investors/companies that buy the property as an investment. These are long-term and predictable investments for the buyers. Buyers are able to negotiate the lease terms that are up to their standards. The buyer has detailed information on the seller, which allows them to get comfortable with the sellers creditworthiness.
A sale leaseback can be a win-win for both sides of the transaction. The seller maintains long term control of the property use, and they are able to gain access to cash that was tied up in real estate. The buyer acquires the real estate at a fair market value, and they are able to secure a long term tenant. The lease becomes a low risk, stable, and secured investment for the buyer. The buyers are making an investment in the seller and, therefore, will be incentivized to help them succeed.