Saturday, December 1st, 2018 December1st2018

Sell for More Trivia: Why should a seller consider a sale-leaseback?

Published on December 1st, 2018

Beau Beach

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

If you’re a business owner who also owns your real estate, a sale-leaseback may make sense for you. I’ve advised a number of our clients to consider selling their commercial real estate and signing a 3-10 year lease with the investor that buys it. This is known as a sale-leaseback.

The main motivation is to sell at today’s high prices and remain in the building as a tenant to avoid a move.

Here are other advantages for the seller:

Converts Equity into Cash

With a sale-leaseback, the seller regains use of the capital that otherwise would be tied up in property ownership.  That cash can then be reinvested in the business or for personal uses.

Note: Because capital gains tax reduces the cash from the sale, a sale-leaseback where the property is sold at a small gain or at a loss generally is most advantageous.

Improves Balance Sheet and Credit Standing 

In a sale-leaseback, the seller replaces a fixed asset (the real estate) with a current asset (the cash proceeds from the sale). If the lease is classified as an operating lease, this results in an increase in the seller’s current ratio (ratio of current assets to current liabilities) which often serves as an indicator of a borrower’s ability to service its short-term debt obligations. Thus, an increased current ratio improves the seller’s position for borrowing future additional funds.

Note:  If the lease is classified as a capital lease, the advantages of the sale-leaseback arrangement from an accounting perspective are altered considerably. 

Good Alternative to Conventional Financing

The seller usually receives more cash with a sale-leaseback than through conventional mortgage financing. For example, if the transaction includes both land and improvements, the seller receives 100 percent of the property’s market value (minus any capital gains tax). In comparison, conventional mortgage financing normally funds no more than 70 percent to 80 percent of a property’s value.

The seller usually can structure the initial lease term for a period that meets its needs without the burden of balloon payments, call provisions, refinancing, or the other issues of conventional financing. Moreover, the seller avoids the substantial costs of conventional financing such as points, appraisal fees, and some legal fees.  A sale-leaseback also usually provides the seller with renewal options, while conventional mortgage financing has no guarantee for refinancing.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Prowess IRES which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 414.324.4938, 615.603.9770, click to schedule a call or Beau@ProwessIRES.com