How Businesses Can Realize a Premium by Selling and Leasing Real Estate

As Commercial Real Estate professionals, we recognize the advantages of owning your own facility. However, ownership can also tie up precious capital that can best be used to grow your business, or pay down debt.

Whether you own office, warehouse, industrial or retail properties, a Sale/Leaseback is an innovative option that can maximize your real estate investments by converting a long-term lease commitment into a valuable commodity. Leased investments are especially attractive to 1031 Buyers who will pay a premium for a stable long-term cash flow. That means top dollar for owners who sell their properties but remain as tenants. 

The Sale/Leaseback:  In a typical transaction, investors acquire a property and lease it back to the tenant on a long-term, triple net basis.  This allows tenants to preserve operational control of the facility through the lease, just as if they still owned the property. The lease will provide a benchmark date to either option an extension, sublease, or vacate the facility versus maintaining a presence until an undetermined sale to another owner/occupant were to occur.

Advantages

Conserve Working Capital: Many companies have achieved substantial gains through sale/leasebacks by realizing added working capital. Leasing in this manner is, in effect, 100% financing, releasing capital currently tied up in real estate. Sale/leasebacks provide an infusion of capital to companies that otherwise might not be strong enough to tap the public or private markets. In addition, sale/leaseback transactions are usually cheaper than loans.

Debt Reduction/Acquisition: Capital windfalls from a sale allow businesses to reduce or completely eliminate debt. In addition, new working capital allows for the acquisition of additional facilities, technology and equipment upgrades which owners can use to grow their businesses.

Security and Right of First Refusal: Sellers can include a "Right of First Refusal" clause in their lease which allows them a first right to match any purchase offers should the buyer decide to sell in the future. This provides a safe harbor in the event they wish to re-acquire the property.

Tax Deductible Lease Payments: Rental payments are 100% deductible for income tax purposes. This means both the value of your building and the land is in effect depreciable as part of the rental payments.

Realize the True Market Value of Your Facilities:  Real estate assets often appear on the balance sheet as illiquid or depreciated. Sale/leaseback financing provides a company with access to 100% of the value of those inaccessible assets, generating funds that can be used to increase working capital, expand your business, or eliminate debt. 

Tax Advantage/Leasehold Improvements: In many cases, leasehold improvements may be amortized rapidly, resulting in a larger flow of "tax-free" funds than would be true through ownership.

Increased Borrowing Capacity: With a stronger balance sheet, businesses can realize better loan rates while increasing borrowing power.  A long-term lease is not regarded as a liability in the same sense as a mortgage. 

Increased Return on Assets and Capital: High demand for leased investment properties and low "cap" rates means investors will pay a premium for your property. This allows sellers to realize an "Increased Return on Assets" and an "Increased Return on Invested Capital (ROIC).

 About the Author

John Mendoza is a commercial real estate agent at Commercial Brokers International in Los Angeles.
Mr. Mendoza has 15 years of experience in sale/leasebacks and is a licensed agent in California and Nevada.