With a sale-leaseback transaction, owners of real property, like real estate, can free up the balance sheet capital they've put into an asset without losing the ability to use it. The seller can use the money for other things, while the buyer gets an asset that brings in money immediately. Keep reading this blog to learn everything you need about Commercial sale leaseback investment property.
What Exactly Is A Sale-Leaseback Investment Property?
Sale-leaseback is a specific type of financial instrument in which the owner of an asset (the seller/future lessee) sells the asset to an investor (the future lessor). Then, the seller rents the asset back to the buyer. The buyer is the landlord, and the seller is the tenant. The benefit to the seller is that they can get money without having to move or stop running their business. Also, they are selling the asset at the current market price, probably more than what they paid for it in the first place.
The investor gets a return on their investment right away in the form of monthly rent payments when they buy an operating asset. So they don't have to spend money on marketing or leasing campaigns to find tenants.
Types of Sale-Leaseback Property Investments
There are two kinds of selling and leasing back in the business world: operational and capital leases. A selling-and-leasing-back contract is usually set up as an operating lease, but in some cases, it will be treated as a capital lease. A sale-and-leaseback deal is usually a capital lease if the lease has a buyback option, a buyback deal at a discounted price, or if the lease value is more than 90% of the property's value.
By putting some or all of the risk of operating costs on the tenant, the landlord gets protection from rising operating costs. In general, four different types of leases describe the different ways to handle operating expenses:
- Net Lease - Whether the contract is a single net lease, a double net lease, or a triple net lease determines who pays the rent and other costs.
- Percentage Lease - This depends on whether the lessee's profits are gross or net. If a tenant vacates their space, a percentage lease calls for a certain minimum rent payment to be made to the lessor.
- Hybrid Lease - Include the gross and the net rents, in which the owner and the occupant divide the expense of running the building.
- Gross Lease - The tenant is responsible for paying rent, while the lessor is willing to pay for the tenant's living expenses. The tenant is responsible for covering the costs of any extraordinary repairs if specified in the lease agreement.
Advantages of Sale-Leaseback Transactions for Seller-Tenants
When a sale-leaseback is properly executed, the seller-to-be-tenant can earn many advantages. Among the foremost advantages are the following:
- Enhance The Value of Your Company - It might sound strange that selling an asset could help you raise the value of your business, but it's true. But there is a link between higher market purchase prices and businesses that use sale-leasebacks to put money back into their business. When a company wants to buy a competitor or a business that works well with its own (like yours), it usually doesn't want or need commercial real estate. The CRE can weigh down the business like an albatross in this case.
- Benefit From Tax Considerations - Another benefit of being a seller-to-be-tenant is saving money on taxes. For example, if the property has already been fully depreciated and the seller-to-be-tenant hasn't sold it yet, depreciation can't be used as a tax deduction. But after the sale-leaseback is done, the seller-to-be-lease tenant's payments are deductible on the building's current basis. This helps the seller-to-be-tenant improve their overall bottom line.
- The Transformation of Commercial Property Equity Into Cash - This is the most obvious reason a sale-leaseback agreement is a good idea. By doing this, you, as the owner of the business and the seller, keep full control of your property, as stated in your new Absolute NNN lease agreement, and you also get more cash. This new cash on your balance sheet can then be put back into other parts of your business, such as buying more efficient capital equipment, opening a new office out of state, or doing anything else you think will bring in more money.
The Bottom Line
A sale-leaseback is a Commercial Tax Assessments St Louis deal in which a property is sold, and the new owner rents it back to the original owner simultaneously.
For business owners, this transaction can make an asset that is usually hard to sell more liquid. Most of the time, these funds are used to pay for other business costs. But to get them, they might have to give up future gains. For investors, this deal can add valuable real estate to a growing portfolio and provide a steady source of cash flow through a lease agreement signed at closing.
One way for investors to get involved in this kind of real estate deal is to work with a private equity firm with the experience, resources, and know-how to carry out this kind of deal.
