Facing growing economic pressure, business owners are increasingly looking for innovative ways to access and free up their cash flow. Once such avenue is through the sale and leaseback of their owned business property, which has increased in popularity since the start of the COVID-19 pandemic.
While this concept is nothing new, sub-letting and sale and leaseback transactions are two of the most popular ways to free up cash flow, which is tied up in large assets such as office space. In uncertain times, sale and leaseback transactions are simple, effective, and cause minimal disruptions.
What are a Sale and Leaseback?
In a sale and leaseback transaction, an investor purchases a property currently owned and occupied by the business owner (who also owns the property). Simultaneous with the sale, the parties execute a property lease whereby the business owner leases the property back from the investor. This way, the business can continue as usual.
The lease period is generally a long-term period of at least five years and can provide mutual benefits if structured correctly.
Business As (Un)Usual
An interesting shift takes place during this transaction and changes the dynamic. Once sold to an investor, the lessor becomes the lessee. In addition, the business prioritizes cash flow over asset ownership to stay afloat.
Some of the benefits for the seller, now lessee include:
- Tax benefits
- Continued control of the property
- Minimal disruption to the business
- Focus on other expansion plans
- Reduced risk and improved financial records.
Benefits for the investor include:
- The purchase of an income-generating property
- A confirmed tenant
- A long lease period for peace of mind.
Most leases involved in this type of transaction are absolute net - a term used to describe leases in which the lessee pays rent plus all costs of ownership on the property.
Consider your Rate of Return
Before choosing to pursue the sale and leaseback approach, we urge potential sellers to consider the following two questions:
- What is the rate of return on your company’s core business?
- What is the rate of return you earn on your company’s real estate holdings?
Here, the rate of return on real estate can be compared to potential rates of return should the company invest in “core business” activities. One can ask themselves: Would it make more sense to purchase a new piece of equipment, hire more employees, or undertake research and development – thereby generating a higher rate of return?
The Transaction Process Explained
Transactions of this nature usually take three to five months and are reasonably complex, requiring an agent with a high level of expertise.
Due diligence: We work with our clients to determine an asking price for the property and the financial terms required. An analysis is also conducted on the ownership structure, the property itself, your financial situation, and the market.
Proposal Development: Based on this data, Galetti will prepare a proposal and marketing campaign to generate interest and solicit offers.
Implementation: Offers from qualified buyers are solicited and the best offer is then selected and negotiated.
Sale and leaseback deals are taking place at a rapid rate both locally and abroad. Due to its long-term and complex nature, it is best to work with an experienced, reputable company. Galetti has a solid reputation, support staff across the country, and a vast amount of experience across the agency (broking), capital markets, valuations, and global corporate services.
Our number one priority is guiding our clients in a direction that makes the most financial sense for them.