Sale Leaseback Advantages and Disadvantages

In today’s market, we are seeing an increase in sale leasebacks, especially in the medical office industry. Businesses are using sale leasebacks to access additional capital instead of electing for debt financing or diluting equity raised from obtaining additional investors. In the typical sale-leaseback, a property owner sells real estate used in its business to an unrelated private investor or to an institutional investor. Simultaneously with the sale, the property is leased back to the seller for a mutually agreed-upon time, usually 10+ years of base term with options periods. Here are some pros and cons to consider in this type of transaction:

Advantages

Increase Working Capital

Access to working capital.  Particularly for businesses looking to grow, by selling the property you own (where your business operates) and leasing it back, you can gain liquidity that was previously tied up in your real estate. This transaction gives you access to 100% of the equity you have in the property.

Maintain Control of Property & Property Expenses

Under a sale leaseback, the business/business owner will agree to a long-term lease which allows the business/tenant to maintain 100% control of the property. Just like when the business owner also owned the commercial property, all operating expenses, under the right lease structure, are still paid by the business/tenant.

Capitalize on Market Conditions – Timing Matters

Since the end of 2020, the number of sale leaseback transactions have steadily increased. The transactions are more common in an economic downturn because it is a way to increase liquidity when cash is tight. Additionally, standard investment deals are more difficult to finance in today’s market while the sale leaseback is typically a straightforward transaction. 

Disadvantages

Tax Liabilities

One key item to be cognizant of is the potential tax liabilities associated with capital gains that you may be responsible for after the sale of your property. 

Appreciation and Depreciation

Consider what you’re giving up by no longer owning the property. For example, you won’t be able to leverage any depreciation benefits and you will forfeit future appreciation.

Control of The Property

By selling your property, you may be forfeiting control of the real estate which means you no longer have authority over the asset, but business owner (seller) can often incorporate favorable lease terms with the investor (buyer). 

A sale leaseback transaction can be highly beneficial to a business looking to increase working capital without the confines of traditional debt financing. However, working with an experienced commercial real estate broker will help ensure you are making a decision to best benefit your business and successfully leverage a sale leaseback. McWhirter can help!