Sale-leaseback strategies Featured

7:00pm EDT January 29, 2008

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 philton@ctmt.com.