Benefits of Unlocking Equity in Your Building
- Do you currently operate a business out of the building you own?
- Have you considered refinancing your property to pull equity out of the real estate?
- Are you continually looking for effective tax strategies to reduce your tax exposure?
- Do you see your business expanding into additional locations or markets in the future?
If you answered yes to any of the above questions, then it may be worth exploring the opportunities a sale leaseback will present to you and your business.
What Is A Sale Leaseback?
By definition, a sale leaseback is a financing tool used by owner-operators across various industries. Through a sale leaseback, an owner-operator sells their real estate interests to a buyer and simultaneously signs a lease as a tenant to secure the location and operate at the property. In simpler terms, a sale leaseback occurs when you sell a property you operate out of and sign a lease with the buyer who acquires the property.
A sale leaseback has become an important strategy used to unlock current value to better position a business for future growth. This industry-wide tool has been popular for many years, as it allows owner-operators to realize their locked-up capital and use it more productively. Different businesses will look to structure a sale leaseback for various reasons, which demonstrates the numerous benefits of a sale leaseback.
In H1 2022, there were over 397 industrial sale leaseback transactions, a 5% increase compared to sale time last year.
In the following article, Matthews™ breaks down the benefits that a sale leaseback can provide for industrial owner-operators around the country.
Benefits to Structuring a Sale Leaseback
Improved Financial Statements
The gain realized from a sale leaseback increases liquidity and can often be amortized on the corporation’s income statements. The reported increase in earnings shows a substantial cash flow after the sale and a nominal cash outflow for rental expenses. This reduces the cash outflow levels immediately, which can help with liquidity ratios and margins moving forward.
Plans of Future Expansion or Growth Within the Company
Regardless of the type of operation, the idea of organic growth into additional locations will forever be sought after. This spans from single-unit operators to operators with hundreds of locations throughout the country. Unlocking capital from the sale of real estate, gives the business owner the opportunity to invest in new markets and R&D to help achieve growth for the company.
Desire to Take Capital out of the Real Estate to Reinvest
A sale leaseback allows an operator to access capital that otherwise isn’t “working” for them. Companies can use capital from a sale to reinvest back into their core business or another investment vehicle of their choosing. Groups typically receive higher returns from their current operations rather than from owning their real estate, so a sale leaseback can be a great tool to expand and grow their business.
Sale Leaseback Fundamentals
$2.247B in industrial deals have occurred in the past 12 months
A Sale Leaseback Provides
– Full Control of Lease Terms
– Flexible Terms
– Immediate Access to Capital
Ability to Convert 100% of Equity into Cash
In most common financing scenarios, a bank will only allow you to borrow 60 to 70 percent of the equity that your property holds. A sale leaseback will enable you to receive 100% of your equity in cash which is 30% to 40% more than traditional financing. Additionally, when refinancing, a bank is typically in complete control of the terms of that deal. When you structure a sale leaseback, the operator decides the terms of the agreement, how the lease is structured, and how much they will be paying in rent moving forward. Variations in the lease term and rent can cause variances in the sale price of the real estate, but at the end of the day, the operator has full control as to what parameters are set. It’s also important to note that the new rent payments may be less than the current mortgage payments.
When traditional financing isn’t available, a sale leaseback is always an option. Sale leasebacks allow operators to gain access to cash within three to six months of deciding to sell their building.
Satisfy Debt Obligations
A sale leaseback provides the opportunity for a group to gain access to cash reasonably quickly—within three to six months. This allows companies, especially those affected by COVID-19, to pay down existing debt, rent, strengthen capital reserves, and immediately improve their balance sheet and cash position. A sale leaseback can be used to monetize a group’s real estate and provide much-needed liquidity.
Capability to Structure Flexible Lease Terms
A sale leaseback gives an operator full control of the operations at the building while, allowing them to pull a large sum of capital out of the real estate. Leases can be structured with one to twenty year base with options to renew. A typical lease structure for a sale leaseback is a triple net lease, where the tenant is responsible for all operating expenses and taxes.
Reduce Risk of Decline in Real Estate Market
By owning the real estate that they operate out of, operators are in the same risk pool as every other real estate owner in the country. The value of that building will fluctuate as the real estate market fluctuates. In most cases, the highest value of an industrial asset will be achieved through a sale leaseback.
Tax Benefits
The main tax advantage of a sale leaseback is that rental payments under a lease are typically fully deductible against the company’s taxable income. With traditional financing, a group is only able to deduct interest and depreciation.
Sale leasebacks can be an excellent tool for industrial operators for various reasons. That said, owner-operators should take into account specific risks and considerations when negotiating any contract and lease. Working with an experienced industrial broker and attorney can help mitigate these risks on a sale. To start exploring if a sale leaseback is the right strategy for your group, please reach out to a Matthews™ Industrial specialist.
