What is Sale-Leaseback in Commercial Real Estate?
In commercial real estate, a sale-leaseback is a transaction in which one party sells a property and then leases that property back from the new owner. Sale leasebacks usually involve a pre-arranged contract, which often lasts 20 to 30 years. Sale leasebacks are especially helpful for business owners who are holding onto expensive retail or office property, but have cash flow problems or need equity to expand their business.
In most cases, sale-leasebacks are triple net (NNN) leases. Often, they also include options for a tenant to renew their lease. In some cases, sale-leaseback agreements give the tenant an option to repurchase the property after a certain period.
Sale-Leaseback Benefits for Sellers
Sale leasebacks can be incredibly helpful for businesses that want or need to stay in their current location but need a new source of cash to stay afloat. Unlike a mortgage, in which only interest is deductible, sellers can typically deduct the full cost of rent from their taxes. However, this may not be the case if the seller reserves an option to repurchase the property later.
- Sale leasebacks are a type of transaction in which one party sells a property and then leases that property back from the new owner.
- Sale leasebacks are especially helpful for business owners who are holding onto expensive retail or office property, but have cash flow problems or need equity to expand their business.
- In most cases, sale-leasebacks are triple net (NNN) leases. Often, they also include options for a tenant to renew their lease.
- Sale leasebacks can be incredibly helpful for businesses that want or need to stay in their current location but need a new source of cash to stay afloat.
Why Do a Sale-Leaseback?
There are a number of reasons why someone would do a sale-leaseback. There are pros and cons to a sale-leaseback, depending on your situation.
Leaseback Pros: Increased Capital, Tax Deductions and More
The main reason people do sale-leasebacks is to free up capital that they can use in their business and therefore improve their balance sheets.
“Proceeds can be reinvested in the business to hire new employees, upgrade equipment, or make other enhancements that support long-term growth,”
Sale leasebacks also come with tax deductions for the lessee.
Reinberg also noted,
“Businesses that agree to rent their space back from a new owner often have more negotiating power than a typical tenant and can structure their lease in a way that retains control over the property.”
A sale-leaseback agreement can also be good for the buyer, who is leasing the property back to the original owner.
“For the buyer, I think the biggest pro would be you’re getting a stabilized real estate asset with a long-term tenant in place,” said Patrick Moroney, Director of Real Estate at zoned properties.
Leaseback Cons: Potential Loss on Property Appreciation
On the other hand, there can be cons to a sale-leaseback transaction. The main downside for the seller is that the property might appreciate in value, causing them to lose out on that appreciation.
“There is a chance the owner-occupier might sell for less than the property will be worth in the future, or enter into a long-term lease only to have market rents decrease below their monthly lease payments,”
Sale-Leaseback Tax Implications
In a sale-leaseback situation, rental payments are fully tax-deductible, meaning the payments can be subtracted from the renter’s gross income. In conventional mortgage financing, the borrower can only deduct interest and depreciation. However, often, rental deductions exceed depreciation deductions, making a sale-leaseback a better option in terms of tax deductions.
Example of a Commercial Sale-Leaseback
One example of a commercial sale-leaseback transaction involves a real estate sale that Moroney worked on in Phoenix, Arizona. The property owners needed to expand their current property and raise money to do so, because the growing product can be expensive, Moroney explained.
“I was able to bring a landlord partner that they were comfortable with,” Moroney said. “And they ended up selling the building to them. They were able to free up some money to finish their grow, which improved their business and operations.”
Leasing Over Owning Can Be Beneficial to Your Business
As a whole, the number of sale-leasebacks is currently increasing, mainly due to rising rent and property costs. It’s always a good idea to talk to an expert or a financial advisor with experience in sale-leasebacks to determine if that’s the best route to go for your commercial property.