What are the Advantages & Disadvantages of a Sale Leaseback?
What is a Sale Leaseback?
Sale leasebacks occur when a business sells a building it both owns and occupies while entering into a long-term lease agreement with the purchaser of the building. Sale leasebacks are a strong alternative to conventional financing as they allow users/owners of property to free up excess capital that has been invested in real estate and put it toward other uses.
What Companies or Properties are Good Candidates for Sale Leasebacks?
- Properties with single tenants
- Most property types, such as office, retail, medical, and industrial
- Companies with a long and provable operating history as well as a healthy balance sheet
- Companies which are willing to enter into leases of at least ten years at the current market rate
- Companies which are willing to enter a triple net lease and agree that the tenant will be responsible for any and all operating expenses
What are the Advantages of a Sale Leaseback?
- Will convert non-liquid real estate assets to usable capital without stripping the user of control over or use of the property
- Will avoid costs usually associated with conventional debt financing for real estate transactions
- Will allow the user/seller to depreciate the land as the lease payments will cover the use of land as well as the building
- Lease payments are tax-deductible
- Will remove debt associated with real estate from the balance sheet and improve the company’s debt to equity ratio
What are the Disadvantages of a Sale Leaseback?
- Any future property value appreciation is forfeited by the user
- The user can no longer sell the real estate as part of any subsequent sale of the business as a whole
- In cases where the property has been owned for a long period, the tax impact incurred may be substantial.
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