What are Sale Lease Back Properties?
This is a lease in which one party sells a property to a buyer and then buyer immediately leases the property back to the seller for a mutually agreed time period, usually 20 to 25 years. It allows the buyer to make full use of the asset, while not having capital tied up in the asset. Sale-leaseback transactions have been a viable strategy of financing in commercial real estate industry for more than a quarter century. These sorts of transactions are an ideal option when traditional financing such as a bank loan, is difficult or expensive to avail. This is why most companies are still carrying out such transactions.
When to Enter into a Sale Lease Back?
As we know, a sale leaseback is a financing technique that helps to raise cash for your business. It may be used when a business sells its real estate asset to a third party for a fair market value and then immediately enters into a long term lease of 20-30 years and continues to occupy the leaseback property. Alternatively, a company identifies an existing asset that it desires to use. It then allows a third party to buy that property and quickly enter into a long-term lease agreement to occupy the property. This is a great investment option, because the buyers don’t have to keep their capital tied up in the property, they can lease back their asset and invest the obtained cash to expand their business.
Why Invest in Sale and Leaseback Transactions
Despite the downturn in the real estate, the number of sale and leasebacks have been increasing considerably. This is why most investors are still carrying out such transactions in the US and other parts of the globe. According to CB Richard Ellis, 17% of all property disposals in the first half of 2009 came through sale and leasebacks. Real estate surveys suggest that the lack of financing or the availability of only expensive financing from banks is also forcing companies to invest their money in sale lease back transaction- a great alternative to bank loans that come with higher interest rates. A leaseback allows a company to release cash tied up within the real asset, strengthen its balance sheet and improve operational cash to allow further investment in business. Whether you need to pay debt, invest further in business or make strategic investment, lease and back property seems to be a great idea.
Top Benefits of Sale Lease Back Properties
In today’s new economy, sale and lease back deals are becoming very popular for businesses. They are major source of funding and supporting business expansion plans. Here we discuss key benefits:
- Better Financing – The seller can structure long term lease to meet his/her needs without the need of expensive financing such as bank loan, refinancing, balloon payments, etc.
- Flexible Terms – There are reduced lease payments initially for the first three years of the term and then these payments go up a bit to make up for the softness in the beginning.
- Renewal Options – Usually, these types of transactions are for 10-20 years, but there are always renewal options.
- Improvement in Balance Sheet & Credit Standing- As it is a lease and doesn’t show as a financial obligation (debt). It is done to replace the fixed asset to obtain from the sale.
- Tax Deduction – The lease payment is 100% tax deductible and thus helps you save money.
- Sublease Option – The user can sublease all or a portion of the property to make a huge profit out of it.
- No Loan Fees- As you don’t have to pay loan fees, you save lots of your money.
- Quick Closing – Less time taken in closing, because you are dealing with one tenant – 30 to 60 day closings are typical.
- Cash Injection – The seller (company) can get the proceeds from the sale and use it elsewhere in business.
Who Sells & Buys Sale Lease Back Properties?
The sellers of the lease properties are mostly real estate developers, business owners, corporate or franchise firms. They lease their property to qualified tenants (businesses, institutional investors, or government bodies) in order to invest the proceeds back into business, expand the business, remodel or reduce the company debt. Leasebacks are a better alternative to highly expensive financing such as bank loans, mortgages, refinancing and other forms of traditional financing in the United States. Leasebacks are becoming more popular because they generate cash for immediate use in business.
Important Things to Consider When Investing in Leaseback Properties?
Leasebacks have risen in popularity in the US real estate market especially over the last 7 years. While they offer many benefits, there may be some risks as well for the new investors. If you are a newer real estate investor, then you need to take up the following steps for safe real investments:
- Hire a CPA- who will give you an opinion about tenants financial strength.
- Review tenant’s financial statements – because you need a tenant with profitable business after paying rent and other expenses such as taxes, insurance and maintenance expenses.
- Lease guarantee- ask for the lease guarantee, because if the tenant defaults the lease, then you can go after the guarantor’s properties to recover lost rental income.
- Hire a commercial a good real estate attorney to work on the lease to cope up with the legal issues that might crop up during the lease period.
- Have a broker with rich experience to represent you in complex sale & leaseback transactions.
- Check out tenant/seller’s background- do a back ground check on the owner for business and even criminal records to play safe.
Apart from all this, you also need to consider thinks like price of the lease property, its location, market value, benefits and lease terms. For help or advice on lease back investment opportunities, please consult Triple Net Investment Group Inc. Our real estate experts will help you identify the right lease properties and explain the pros and cons of investing in various types of real estate products. We offer valuable tips, numerous resources and hot property listings to enlighten real estate investors in the US.