What is a Sale Leaseback and How Does it Benefit a Business Owner?
If your business generates a higher return through operations than it does in real estate, a sale leaseback may be an opportunity worth seizing.
Your business and the real estate in which it operates are powerful assets. With the right real estate partner and under the right circumstances, a sale leaseback transaction can be a win-win scenario for business owners seeking to unlock value from their real estate and power business growth.
A sale leaseback is a financial transaction wherein a business owner sells his or her commercial real estate for cash, and then leases it back long-term from the new property owner. Sale leaseback transactions are a popular strategy for business owners to raise funds, increase earnings, and free up immediate capital.
Additional benefits of a sale leaseback include:
Extract hidden equity. Liquidate your real estate and obtain 100% of market value, whereas a traditional mortgage lender offers only a percentage of the asset’s value (typically 65%-75% loan to value (LTV)).
Reduce taxes. Lease payments are tax-deductible as a business expense, potentially reducing your overall tax burden. Deduct 100% of your rent expense versus only the interest portion of your debt service.
Reinvest capital for growth. Use the proceeds to strategically reinvest in your business, which generates higher yields. This can be especially beneficial for companies looking to seize new opportunities or manage financial challenges without incurring additional debt.
Retain control of real estate through a triple-net lease. Leases can be flexibly structured to meet the company’s operational needs. Your business has full control of the real estate through leasehold rights.
Generate a more attractive sales offering than a vacant building. Typically, asset prices are higher for sale leasebacks than for a vacant property.
Lower risk in the event of a downward market shift. Real estate values ebb and flow, and a sale leaseback is a strategy to mitigate risk in down markets. Consequently, lock in gains while the real estate market is up and reduce exposure to downturns.
Mitigate risks associated with ownership. These include hazards, maintenance, depreciation, liability issues, and more. Leasing transfers many of these responsibilities to the lessor, allowing you to focus on your core operations.
Gain a long-term partner. A partner who supports future expansion and/or interior buildouts will propel your business forward, while eliminating the need for you to invest unnecessary capital into real estate.
If your business generates a higher return through operations than it does in real estate, a sale leaseback may be an opportunity worth seizing. Finding the right partner who understands your goals is imperative to growth and expansion.
As an investor in both companies and real estate, Borgman Capital possesses operational expertise that standalone real estate firms lack. We can help you to see the big picture - that is, the full potential of both assets as individuals - and guide you in a direction that feels right to you. Learn more about Borgman Capital’s real estate capabilities here.