Leveraging Sale-Leasebacks: A Strategic Move for Business Owners

In an economic climate where liquidity is king, business owners are constantly on the lookout for strategies to unlock capital tied up in non-liquid assets. Sale-leasebacks present a compelling opportunity, particularly for those with valuable real estate assets. This financial arrangement can free up essential capital from owned real estate, allowing businesses to reinvest in growth, innovation and operational efficiency.

Why consider a sale-leaseback?

A sale-leaseback involves selling your property to a buyer and then leasing it back for a long-term period. This strategy enables you to continue using the asset without the financial burdens of ownership. It’s an ideal solution for businesses looking to convert their real estate holdings into working capital or simply to take some chips off the table without disrupting day-to-day operations.

Operational and financial advantages

The benefits of sale-leasebacks extend beyond just liquidity: 

• Immediate capital release: Unlock the equity built up in your real estate, providing immediate funds that can be used for critical business needs, such as expansion, research and development, or refinancing other debts.
• Off-balance sheet financing: Improve your financial ratios, which can enhance your company’s borrowing capacity, by moving liabilities off your balance sheet.
• Tax efficiency: Lease payments are often fully deductible as business expenses, potentially reducing taxable income.
• Control and stability: Retain control over your operational premises with long-term lease agreements, ensuring business continuity and stability.

Example of a sale-leaseback transaction

Consider a company that owns a 10,000-square-foot headquarters building. If the company agrees to a 10-year lease at a rental rate of $20 triple net (NNN) per square foot, they can engage in a sale-leaseback transaction. A buyer might pay based on a 9% capitalization rate if the company has solid credit. This would equate to a sale price of approximately $2.2 million:

Annual Rent = 10,000 SF × $20 PSF = $200,000

Sale Price = $200,0000 / .09 = $2,222,222

This $2.2 million from the sale can be utilized to invest in future company growth or help the business owner diversify their financial exposure to their company.

Key considerations for maximizing value

To ensure a sale-leaseback arrangement works in your favor, consider these key aspects:

• Fair market value: Ensure you receive a fair sale price for your property that reflects its market value.
• Lease terms: Negotiate lease terms that match your business’s long-term goals and operational requirements, including reasonable rent rates and lease duration.
• Tenant creditworthiness: Although you are the tenant, the buyer will consider your creditworthiness a key factor in the transaction’s appeal. A strong credit profile can lead to better terms.
• Property appeal: The building's location, condition and utility can significantly impact its attractiveness in a sale-leaseback deal. Prime properties in desirable locations typically fetch higher valuations and more favorable lease conditions.

Conclusion

For business owners, engaging in a sale-leaseback can be a strategic move to enhance financial flexibility and secure capital for growth. By converting fixed assets into liquid funds, you can position your business for success without the traditional constraints of real estate ownership. As you consider this option, work with corporate real estate professionals like Site Selection Group to navigate the complexities and maximize the potential benefits for your business.