As more business owners are looking for reliable sources of capital in today’s shifting markets, many are turning to sale-leasebacks as a major source of funding. For many, this is a familiar method of raising capital for business needs, and for some, this is an entirely new potential revenue stream. Join us as we explore some of the key elements and benefits of a sale-leaseback, and how it could be beneficial to your business. 

The Key Elements of a Sale-Leaseback

A fairly straightforward transaction on the surface, sale-leasebacks are primarily utilized as a financing tool for businesses for a wide variety of potential reasons. It consists of a two-part transaction that operates in the exact order that the name itself implies. A business owner, who also owns the property they are operating on, sells that property to an interested buyer. As part of the sale, they sign on as a tenant with a long-term lease so they can continue to operate the business day-to-day. 

This transaction allows the business owner to monetize the capital that they would have invested in the real estate, allowing for immediate benefits. This return of capital can be great for reinvesting in the business, financing new growth and new locations, or even paying down existing debts. This is considered an attractive option for many businesses because it allows them to pull 100% of their equity out of a property, compared to the 60-70% they may be able to receive from a typical bank loan on the overall property value. 

Additionally, most sale-leasebacks are structured as long-term triple net leases, which makes them much more attractive to potential investors, due to the hand-off ownership structure that comes with this type of lease. This means that business owners will typically be able to find multiple interested parties to enter into this kind of deal with. In some instances, the rent paid through the lease can be deducted as a business expense, making the lease a much more attractive option for many business owners. 

Attractive to All Parties

A major reason that sale-leasebacks are such a great option for producing capital is the fact that the transactions are highly attractive to all parties involved. 

The business owner and soon-to-be tenant, gets immediate access to funds that they can use to operate or expand their business, with no real changes to their operations. At the same time, investors or buyers who are soon-to-be property owners get more reliable tenants and more secure investments. This is because, generally speaking, the business owners that are looking to execute a sale-leaseback tend to be larger, more established businesses with better credit ratings. While it is possible to enter into a sale-leaseback with smaller, independently owned businesses, they don’t typically go looking for this kind of arrangement. 

Investors can also potentially benefit from specific tax considerations when entering into a sale-leaseback, due to the ability to deduct depreciation on rental properties. Because these depreciation expenses can be used to offset the taxable net income a rental property generates, they are often cited by real estate investors as one of the largest benefits of owning real estate. Should the investor decide to sell the property in the future, they would need to recapture any depreciation expenses taken and pay tax at that time, which in turn can make 1031 exchanges an enticing option for property owners to explore.

Securing businesses with higher credit ratings also tends to mean that property owners can expect to see more favorable rents than would typically be paid by smaller business tenants. The long-term format of these leases also means that the new property owners won’t need to worry about the vacancy rate of the property due to the previous owners staying on as tenants. This, in its own right, can be extremely attractive to some potential buyers, as sourcing reliable tenants can be a major obstacle that prevents some investors from entering the retail arena. 

A Great Option for Turbulent Markets

Many businesses are turning to sale-leasebacks today as a funding strategy due to the fact that it is an extremely viable option during cycles where the real estate market is considerably more volatile. This type of transaction is considered more attractive to business owners and property owners, and both parties have more to gain from the resulting partnership. This mutually beneficial situation leads to both parties being more open to cooperation, and carrying out more realistic negotiations. 

Investors also know that they aren’t just purchasing a property but a passive rental-income stream, and as a result, will generally be more comfortable with higher purchase prices for properties. While other retail properties could require daily management to maintain the property, find a tenant, and then act as property manager for that tenant, a sale-leaseback instead offers a steady stream of income. Especially in situations where the lease is structured as a long-term triple net, investors are typically very eager to enter these kinds of transactions. 

Additionally, because these are typically net lease transactions, the details can be adjusted to give each party what they need from the eventual deal and keep the transaction enticing for those involved. This means the cap rate and rental rates can be adjusted in tandem to create a deal that will give the seller the overall value consideration that they have been looking for, without losing the buyer’s initial return on the property. And because of the continued partnership that this type of transaction results in, some leases could be restructured in response to market shifts, as has been seen recently with repeated hikes to interest rates.