Sale Leaseback Overview
Sale Leaseback (SLB) is the best way for a corporation to take full advantage of the underlying value of their real estate. In many ways the Sale Leaseback allows a corporation to retain control and use of their real estate and to utilize 100% of the cash generated by the transaction. By establishing a long term operating lease they can take the real estate liability off balance sheet and replace it with a tax deductible operating lease.
They can then take the cash derived from the transaction and pay down debt or redeploy in existing or new operations. As far as the investor is concerned it is a single tenant net leased property acquisition with a tenant already in place with a long term lease. No leasing commissions, no vacancy risk upon acquisition.
What is a Sale Leaseback?
A sale leaseback is a transaction in which an investor purchases a property currently owned and occupied by a user. Simultaneous with the sale, the parties execute a lease whereby the user leases the property back from the investor. These sale leaseback transactions can provide excellent benefits to the investor and the user if structured properly.
For decades owner/users have used sale leaseback transactions to free up capital invested in real estate and convert it to alternative uses, primarily in their business.
Property types that lend themselves to sale leaseback
- Freestanding single occupant buildings that may be industrial warehouse/distribution
- Research and development facilities
- Corporate offices
- Most types of retail
Governmental entities have even investigated the possibility of sale leasebacks for some of their facilities.
Sale Leaseback Advantages
A sale leaseback transaction can offer an attractive alternative to placing debt on the real estate to raise capital.
Any debt placed on the real estate is listed as a primary liability on the balance sheet. However, the lease from the sale leaseback – if structured properly – is noted as a footnote on the balance sheet instead of a primary liability.
Quite often, if the facility has been owned for a reasonably long period of time, the balance sheet can be improved. An asset at current book value is removed from the balance sheet and replaced by the cash that is raised from the sale leaseback. The cash raised from the sale leaseback is often greater than the book value of the asset being sold. From the investor’s perspective the sale leaseback transaction creates an investment with a tenant already in place and operating a business.
Most leases involved in the sale leaseback transaction are absolute net, thereby eliminating most of the property management problems for the investor.
Sale Leaseback Benefits
The sale leaseback transaction offers the following potential benefits to users/sellers
- Converts a non-liquid real estate asset to cash — which is a very liquid asset — while retaining control and utilization of the property.
- Moves a capital asset at book value from the balance sheet and replaces it with cash received from the sale. The lease, if structured properly, goes onto the balance sheet as a footnote and not a primary liability.
- Avoids the cost of conventional debt financing or refinancing associated with encumbering the property with debt financing. Debt financing also goes on the balance sheet as a primary liability.
- Allows the user to effectively depreciate the land as the lease payments cover the use of the land and the building. The lease payments are tax deductible.
- Offers an ownership exit strategy for a user who might not otherwise be able to readily sell the real estate.
The sale leaseback transaction offers the following potential benefits to investors
- Secure a stable, long-term income stream
- Acquire an investment with relatively low management intensity
- Provides a tenant that is already sold on the location and the property
- Provides the potential for appreciation in value
- Depending on the lease terms, can be a hedge against inflation
- Deductibility for tax purposes of cost recovery and also interest if debt financing is used
Garabedian Realty Advisors
Garabedian Realty Advisors is actively seeking to acquire single tenant assets for it’s own account and for institutional partners.
We always act as principle, meaning we don’t charge fees or commissions to seller or seller’s broker.
We can provide a quick response, often with a letter of intent the same day.
We specialize in Sale Leasebacks of industrial, retail and office buildings in primary and secondary markets in the USA and Canada. Sale Leaseback Canada / USA