There are several ways in which a business can obtain funds. A business loan is probably the first thing that comes to mind. But if your business has real estate holdings, there’s a potentially better way to raise business funds.
If your business generates a higher rate of return than your investment in real estate, then you can benefit from a sale leaseback arrangement.
What is a Sale Leaseback Arrangement?
When dealing with real estate, you might hear a sale leaseback referred to as a leaseback. Rest assured that both terms mean the same thing when discussing commercial real estate.
A sale leaseback is when the owner of a piece of real estate sells the property to a buyer. The seller then leases that same property from the buyer.
For this arrangement to work, you (the seller) and the buyer must agree to the following:
1. As the current owner of the property, you must sell the property for a set price.
2. The buyer (the new owner) must agree to lease the property back to you for a long-term lease. The buyer becomes your landlord and you become their tenant.
The idea might sound odd at first. After all, why would a business sell its real estate only to turn around and lease it back? There’s a good reason why a sale leaseback can make perfect sense for a business.
How a Seller and a Buyer Benefit from a Sale Leaseback
Your business gains much-needed funds from the sale of the property. But you’re allowed to continue using the property the same as before you sold it.
The buyer becomes the new owner of a valuable piece of real estate. This is especially beneficial for a new real estate investor or a residential real estate investor who wants to try their hand at commercial real estate.
The sale lease back allows your business to:
- Use the funds to pay vendors, pay creditors, pay investors, expand the business, and invest in other financial vehicles.
- Have an easier time balancing expenses because the lease amount is a fixed price.
- Receive a tax break by listing rent as a deductible business expense.
The sale lease back allows the buyer to:
- Become the owner and landlord of an income-generating piece of real estate.
- Secure long-term income because the use of the property is vital to your business operations.
- Reduce their tax bill by listing the property as a depreciation expense. The larger the depreciation expense, the lower the tax bill.
And since the buyer has a long-term lease with you, they already have a paying tenant in place. That means the buyer immediately starts generating long-term income as a landlord.
Potential Drawbacks to a sale leaseback
So far, you’ve learned of the advantages provided by a sale leaseback. But as with most business dealings, there are also possible disadvantages to consider.
Possible disadvantages for the seller (and now tenant) include:
- When the lease ends, the seller-tenant will have to negotiate an extension. The new rent amount might cost more than the current rent amount. If no agreement is reached, then the seller will have to vacate the property.
- The seller-tenant no longer has complete control over the property. The buyer must approve any remodeling or modifications needed for the property.
- The seller-tenant could end up paying higher than fair rent for the property. The commercial real estate market could depreciate. But since the seller-tenant signed a long-term lease, they will continue to pay the original contract amount – even if it’s above the current worth of the property.
Possible disadvantages for the buyer (now landlord) include:
- If the seller-tenant defaults on the lease, then the buyer-landlord has to deal with the setback.
- The buyer-landlord will have to try and reach an agreement with the seller-tenant or proceed with an eviction. The buyer-landlord will then have to find a new tenant willing to pay the asking price of the lease.
- The buyer-landlord will have to oversee the use of the property. The seller-tenant no longer owns the property, but they might still treat the property as their own. The buyer-landlord will have to make sure the property remains in good condition.
Make Smart Choices with Commercial Real Estate
The positives outweigh the potential negatives. But you must consider the entire picture when considering a business deal.
Are you interested in selling commercial real estate via a sale leaseback? Point Acquisitions is the best choice for property owners who want convenience, simplicity, and a stress-free process. A company such as Point Acquisitions can help weigh the pros and cons when it comes to a sale leaseback transaction.