Sale-leaseback strategies

Asale-leaseback is a transaction
whereby an owner of real estate
sells its property to an investor, subject to a lease that allows the seller to utilize the property during the
term of the lease. The primary reason
an owner would do a sale-leaseback
would be to free up capital to grow
their business.

Sale-leasebacks can benefit a company by reducing costs and maximizing
profits. On the other hand, increased
taxes and long-term obligation can be
potential drawbacks.

“Sale-leasebacks are a proven strategy for many companies,” says Paul M.
Hilton, senior vice president and principal of Colliers Investment Services
Group. “However, there are definitely
instances where a sale-leaseback is
not a good strategy.”

Smart Business spoke with Hilton
about sale-leasebacks and what this
type of transaction can mean to your
company.

What are the benefits and drawbacks of a
sale-leaseback?

There are several benefits to a sale-leaseback. Some of them are:

  • Maximum proceeds. The seller
    receives 100 percent of the market
    value of a property, as compared to
    conventional financing, which would
    typically only provide proceeds of a
    maximum of up to 75 to 80 percent of
    the market value.

  • Lower costs. In many instances,
    the cost of the funds from a sale-lease-back are lower than financing.

  • Investment funds. A sale-lease-back typically allows a company to rein-vest the proceeds from the sale of the
    property into the business in order to
    grow the company, usually generating a higher rate of return on the capital.

  • Tax benefits. Rental payments
    are often fully tax deductible, whereby
    payments on loans only allow for the
    interest portion of the payment to be
    deducted.

  • Off balance sheet financing.
    Under some circumstances, the lease
    obligation does not show up on a company’s balance sheet.

The possible drawbacks of a sale-leaseback include:

  • Long-term obligation. The seller
    is bound by a lease, which requires
    monthly payments.

  • Long-term control. At the end of
    the lease and/or options, the seller
    must negotiate a new lease with the
    owner or relocate.

  • Capital gains tax. The seller may
    incur taxes on the profits from a sale.

Are sale-leasebacks better for the buyer or
the seller?

Sale-leasebacks can be good for both
the buyer and the seller. Sellers obtain
funds to grow their businesses, and
buyers can invest their funds at specified returns. On the flip side, they can
be bad for either party in the event of
a significant change in the business.

For example, if the company is sold
and, as a result of the sale, the company no longer needs the property, the
company is still liable for the lease
payments. On the other hand, if the
seller, or the tenant, has financial difficulties and can no longer meet the
lease obligations, this would be bad
for the buyer.

What should a company look for when considering a sale-leaseback?

When considering a sale-leaseback it
is important to look at the company’s
goals moving forward, the cost of
funds and the reinvestment opportunity for the proceeds. In order to complete a sale-leaseback, a seller needs
input from the accounting, legal and
real estate fields. This team should
work together to structure the terms
of the lease to best meet the company’s goal. For instance, it is important
in structuring a transaction to understand if the company would prefer
higher proceeds from a sale or a lower
long-term lease obligation.

Once the terms of a lease are established, the property should be fully
marketed to the entire investment
community, utilizing a sealed bid
process in order to maximize the proceeds to the seller.

PAUL M. HILTON is the senior vice president and principal of Colliers Investment Services Group. Reach him at (314) 746-0313 or
[email protected].