Are you wondering if a sale-leaseback is a good idea for your business? There are many benefits to sale-leasebacks. For landlords and commercial real estate investors, sale-leasebacks allow you to easily acquire an easy long-term tenant. Business owners benefit by relieving themselves of the burdens that can come with owning property.
In this article, we’ll answer the question “What is a sale-leaseback?” and explain why and how a sale-leaseback transaction can occur.
What Is a Sale-Leaseback in Commercial Real Estate?
In commercial real estate, a sale-leaseback occurs when a property is sold to someone else (called the buyer-lessor) and then leased back to the original owner (the seller-lessee or seller-tenant), allowing a business owner to continue using the property but without owning the property.
“A sale-leaseback happens when the owner-occupier of a commercial property sells it to an investor who, in turn, leases the property back to the original owner, typically under a long-term lease (generally 10 to 20 years), said Ben Reinberg, Founder and CEO of Alliance (check out our interview with Ben after you read this). “This can be an ideal option for sellers looking to free up capital that can be reinvested in the business.”
Often, Reinberg explained, sale-leasebacks occur in medical real estate, with seller-tenants being medical providers who wish to “maintain proximity to their existing patient base.”
“Other commercial sectors in which sale-leasebacks are a common disposition strategy include conventional office, retail and industrial,” Reinberg added.
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,” Reinberg said.
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,” Reinberg noted.
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, oftentimes, 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 cannabis 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 growing cannabis 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.