Meet The Advantages Of Sale-Leaseback Agreement 

Author Casaldra Andreassen Read bio
Tags: commercial real estate leaseback
Date: May 13, 2022

Today, we will discuss why the sale-leaseback agreement is advantageous for your real estate investment business. 

But not only that, this article will serve me well to introduce to you –  when and how a sale-leaseback agreement can be used for optimal benefits.

Why Should You Consider a Sale-Leaseback Arrangement

As we all know, today’s business environment of low-interest rates has increased fixed-income demand for alternative investments. This has generated higher yields for investors. 

A sale-leaseback arrangement comes as an alternative to bank and mortgage financing. A sale leaseback agreement effectively separates the “asset value” from the “asset’s utility value”.

Access to credit is an important role in driving demand. And since bank credits remain relatively expensive and more conservatively structured, it has been challenging for many middle-market businesses to access financing at reasonable interest rates and terms.

As a result, a sale leaseback arrangement can help you reap several benefits:

  1. To really understand your company’s real estate value on the market
  2. Enable you to reduce investment in non-core business assets (buildings and land, for example)
  3. Liberate cash in exchange for executing a long-term lease
  4. Set your own lease terms
  5. Retain control of your real estate
  6. Save on taxes
  7. Fewer financial covenants
  8. An implicit financing rate (“cap rate”) embedded in the future rent payments

We know that real estate values tend to rise, but their rents tend to drop when interest rates are low. With sale leaseback agreement, real estate owners have an opportunity to sell their real estate high when rental returns are low. This will keep occupancy costs at a predictable cash outflow by locking in long-term rental rates.

A man and woman in suits shaking hands on a deal they struck

When To Consider a Sale-Leaseback Agreement

As described earlier, typical financing has an all-in cos, and lenders may often include interest and equity as part of their total return. The Cap Rate of a sale-leaseback is generally hundreds of basis points lower and does not require equity ownership from the selling entity. 

Here are some more points on when a sale leaseback agreement can be useful:

  1. A sale-leaseback can be used to free up cash when money is needed for growth (additional facilities, technology, and equipment). 
  2. When undergoing a corporate restructuring
  3. When seeking exit financing: Businesses struggling to pay creditors or are considering bankruptcy might look to a sale-leaseback for capital
  4. When contemplating business for sale: Often, a business owner can benefit by taking the real estate out of the company sales transaction to maximize the value of the asset and increase the overall gross income

How To Start The Sale-Leaseback Agreement

Sale-leaseback agreements are executed in conjunction with Real Estate Investment Trusts (REITs).

REITs are tax-advantaged structures designed to hold non-operating real estate assets. All sale-leaseback investors follow a strict policy when conducting their due diligence. This is similar to the efforts used when acquiring any real estate. 

REITs provide investors with dividends, plus the potential to meddle with long-term capital appreciation with lower risks than typical equities. As a result, we have a “sweet spot” for many investors that are seeking a more reliable, risk-adjusted income stream.

Finally, when sale-leaseback investors consider their opportunities, they will contemplate the long-run marketability of the real estate – once it’s vacant. This is when the size and shape of the building play a role in the equation.

Sale leaseback transactions have experienced record activity since 2010, with a total contract volume of about $11.6 billion. 

Sale leaseback agreements have become better understood and more frequently utilized by investors and their financial advisors. 

Sale leaseback agreements do not only serve as an alternative to stocks, bonds, and cash, but they can be a critical component of a well-diversified investment portfolio, especially as the demand for income-producing assets has increased.

Signing a document with a pen