A sale-leaseback is a financial arrangement in which the owner of a property sells the property to a buyer and then leases it back from the buyer for a specified period of time. This can be a smart decision for owner-users who want to take advantage of the appreciated value of their property but still maintain occupancy, particularly if commercial real estate values are rising. Cecil & Campbell, a commercial real estate advisors firm located in the Atlanta metro market, has been advising clients on sale-leasebacks for the past 20 years.
According to recent market data, the values of industrial and flex properties in the Atlanta metro area (including Marrietta, Buckhead, College Park, and Smyrna) have seen significant growth over the past five years. While this is a positive development for property owners in this region, it may not be possible for them to capitalize on this appreciation unless they sell the property or borrow against its current value.
For owner-users who wish to continue occupying their space, a sale-leaseback may be a viable option to monetize the appreciated value of their property while still retaining occupancy. A sale-leaseback allows the owner to sell the property to a buyer and then lease it back for a predetermined period of time, enabling them to cash in on the increased value without having to vacate the property.
A sale-leaseback is a financial arrangement in which the seller of a property immediately leases the same property back from the buyer. This is a common method used by businesses to access capital while still retaining the use of the property. While there are potential benefits to transitioning from an owner-user to a tenant through a sale-leaseback, there are also some drawbacks to consider. Here is a list of the pros and cons of this type of arrangement:
- Allows the seller to free up capital by liquidating the market value of the property while still occupying it
- This may result in a larger business expense deduction (rent instead of mortgage interest plus depreciation)
- Makes the property more attractive to buyers by marketing it as an income-producing asset rather than a vacant property
- Offers flexibility in lease terms for the seller (now tenant)
- Removes the risks and costs associated with property ownership
- Avoids potential issues with traditional financing
- Potential increase in property taxes (depending on the purchase price compared to the sale price)
- Monthly rent payments may be higher than previous mortgage payments
- Risk of paying capital gains tax (if the sale price exceeds the adjusted basis)
- Loss of control over the property
It is always important to consider the pros and cons of a sale-leaseback arrangement, regardless of market conditions. However, it is also crucial to understand the current state of the market in which the property is located.
Sale-leasebacks are a flexible tool in commercial real estate transactions. Here is a basic hypothetical scenario:
Imagine a building with 10,000 square feet was purchased in 2012 for $1 million, with a debt of $700,000. The adjusted basis of the building was $800,000, the adjusted basis of the land was $200,000, and the total adjusted basis was $1 million. Under this scenario, it is assumed that the seller has a 20-year mortgage at a 5% interest rate, uses straight-line depreciation, and has not made any additional capital improvements to the building.
Under these circumstances, the seller would receive $1,169,662.11 ($753,846.15 in gross profit) before taking into account any closing costs, potential prepayment penalties, or capital gains taxes.
It is clear that a sale-leaseback can be a useful way to monetize equity in a commercial property. However, every owner-user’s situation is unique, and it is important to carefully analyze and consider all available options before making a decision. Some of the factors to consider when deciding whether a sale-leaseback is right for you may include the benefits of a long-term versus a short-term lease, the potential for conducting a 1031 exchange with the proceeds, and the cost analysis of selling versus holding the property. It is essential to thoroughly evaluate all of these factors to determine the best course of action for your specific circumstances.
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