A sale and leaseback transaction constitutes an arrangement where the seller of an asset leases back the same asset from the purchaser.
Although sale-leaseback transactions may be structured in a variety of ways, a simple sale-leaseback can benefit both the lessee(seller) and the lessor(buyer). Nevertheless, all participants must consider the tax and business advantages, disadvantages, and risks involved in this type of arrangement before going any further.
In the usual sale-leaseback, the property owner sells real estate utilized in its business to an unrelated private investor or to an institutional investor. At the same time as the sale, the property is leased back to the seller for a mutually agreed-upon time period, usually 20-30 years.
The transaction may include either the land or both the land and the improvements. Lease payments are typically fixed to provide for amortization of the purchase price over the term of the lease, as well as a specified return rate on the buyer’s investments.
A triple-net-lease arrangement is the typical type of transaction. Sale-leasebacks often include an option for the lessee to renew its lease, and occasionally, repurchase the property.
Seller Advantages
Avoids Usury Limitations
Deterrent to Corporate Takeovers
Improves Balance Sheet and Credit Standing
Avoid Debt Restrictions
Alternative to Conventional Financing
Possibility of Better Financing
Converts Equity into Cash
Seller Disadvantages
Possible Relocation
Loss of Flexibility
Loss of Residual Property Value
Buyer Bankruptcy
High Rental Payment
Higher Cost of Financing
At Property Specialists Realty, we team with lawyers to ensure that transactions are structured and documented to protect our clients’ interests in the event of a future bankruptcy of the tenant or other party.
