Understanding Sale-Leaseback in Commercial Real Estate

Jul 02, 2024

What is a Sale-Leaseback?

Sale/leaseback transactions are a strategic financial tool used by businesses to unlock capital tied up in real estate while retaining the use of the property. This blog will delve into what sale/leaseback transactions are, how they work, their benefits, and their potential drawbacks.

#### What is a Sale/Leaseback Transaction?

A sale/leaseback transaction involves the sale of a property by the owner (typically a business) to an investor or another party, followed by leasing the same property back from the buyer. This allows the original owner to continue using the property while freeing up capital for other business needs.

#### How Do Sale/Leaseback Transactions Work?

1. **Sale Agreement**: The property owner sells the real estate to an investor or a leasing company. The sale price is usually determined based on the fair market value of the property.
2. **Lease Agreement**: Simultaneously with the sale, the seller enters into a lease agreement with the buyer. The lease terms, including the duration, rent amount, and other conditions, are negotiated and agreed upon.
3. **Capital Release**: The seller receives the proceeds from the sale, which can be used for various business such as expansion, debt reduction, or investment in new opportunities.
4. **Continued Occupancy**: The seller, now the tenant, continues to occupy and use the property under the terms of the lease.

#### Benefits of Sale/Leaseback Transactions

1. **Unlocking Capital**: Businesses can convert illiquid real estate assets into liquid capital, providing immediate cash flow for operational needs or growth opportunities.
2. **Off-Balance-Sheet Financing**: Sale/leaseback transactions can improve financial statements by removing the real estate asset and associated debt from the balance sheet, potentially improving key financial ratios.
3. **Tax Advantages**: Lease payments are typically tax-deductible, which can provide significant tax benefits compared to owning the property.
4. **Operational Continuity**: Businesses can continue to operate without disruption since they retain the use of the property under the lease agreement.

#### Potential Drawbacks

1. **Long-Term Costs**: Over time, lease payments may exceed the cost of owning the property, especially if rental rates increase.
2. **Loss of Property Appreciation**: The seller forfeits any future appreciation in the property's value, which could be substantial in a rising real estate market.
3. **Lease Obligations**: The business is obligated to make lease payments for the duration of the lease term, which can be a long-term financial commitment.
4. **Control Limitations**: As a tenant, the business may have less control over the property compared to ownership, including restrictions on modifications or use.

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#### Conclusion


Sale/leaseback transactions can be a powerful tool for businesses looking to unlock capital and improve financial flexibility while retaining the use of their real estate. However, it is essential to carefully consider the long-term costs and potential drawbacks. By understanding the intricacies of sale/leaseback transactions, businesses can make informed decisions that align with their strategic financial goals.

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For expert advice on sale/leaseback transactions and other commercial real estate financing options, contact Atlantic Commercial Lending. Our team specializes in providing customized financial solutions to help your business thrive.