5 Benefits of a Sale-Leaseback
[Updated August 18, 2021]
If you own a commercial property and want to expand or you need capital to invest in your business, you may want to consider a sale-leaseback. A sale-leaseback occurs when a property owner sells a property but continues operating it by leasing the property back from the new owner.
A sale-leaseback deal can offer advantages to both the seller and the buyer, or the lessee and the lessor, respectively. If you are a seller, you can enjoy the following sale-leaseback benefits.
1. Access to Capital
As the seller, you can pull your money out of the real estate through the sale. You can then reinvest this money into your business, where you will likely get a higher ROI. At the same time, you also retain possession of the property and can continue using it for the lease term.
Typically, you will receive more cash from a sale-leaseback than you will from conventional mortgage financing. Since capital gains tax can reduce the cash you make from a sale, a sale-leaseback in which the property sells at a small gain or loss is usually the most advantageous obvious.
2. Improved Balance Sheet
With a sale-leaseback, you as the seller replace a fixed real estate asset with cash proceeds from your sale. The sale converts a long-term non-liquid asset into working capital and removes the mortgage from the balance sheet. This translates into less debt.
For an operating lease, your rent obligation is typically disclosed in a footnote on your balance sheet, not as a liability. This may lead to an increase in your current ratio, which can improve your position if you want to borrow additional funds in the future.
3. Tax Benefits
When deciding whether to do a sale-leaseback, you may want to consider the tax implications. As the seller, you can enjoy several significant income tax advantages, offering you savings and additional cash.
One of the main tax benefits of a sale-leaseback is that rental payments are fully tax-deductible. With conventional mortgage financing, only interest and depreciation can be deducted. Another tax benefit is that sale-leaseback investment properties are usually held for use in a business and qualify for capital gain-ordinary loss treatment. While retaining the use of the property, you can also choose a sale-leaseback to time the recognition of a gain or loss.
When leasing, you are able to write off the entire rent payment — in ownership, you can only write off the interest portion of your mortgage payment.
4. Control Over Property and Lease Terms
With the sale of a commercial property, one of the major concerns surrounds the potential loss of control over decision-making. The seller or operator has more leverage in lease term negations in this scenario than a traditional lease.
With a sale-leaseback, you can agree to a long-term lease that allows your tenant to maintain control of the property and how their business is run. Under the structure of an Absolute NNN lease, the tenant or business will pay all operating expenses.
One of the biggest objections to the sale of a commercial property is that the business operating in the building will experience disruptions to ongoing operations. Fortunately, with a sale-leaseback, there is no downtime. The seller or operator is able to stay open throughout the transaction, unlike a traditional sale which would involve a move, among other things slowing production.
Learn More About Sale-Leaseback Transactions
At Lee & Associates of Eastern Pennsylvania LLC, we provide commercial brokerage services to multiple sectors of Central and Eastern Pennsylvania, including the industrial, investment, land and office sectors. As a top commercial real estate company, we can help you find a property that allows you to grow and flourish.
Our offices are located in Central Pennsylvania at 4550 Lena Drive, Suite 104, Mechanicsburg, PA, USA 17055, and in suburban Philadelphia at 220 W. Germantown Pike, Suite 200, Plymouth Meeting, PA, USA 19462. If you want more information about sale-leaseback deals, contact us today.
Read More About Commercial Property Leasing