What is sale-leaseback?

In a sale-leaseback, when the owner of a property or building is selling the asset, the seller negotiates to lease the asset back from the buyer as part of the sales agreement. The seller (previous owner), in turn becomes the lessee, and the buyer (new owner) becomes the lessor.

What are the benefits to the lessee?

CRE investors like leasebacks because they provide predictable long-term income and are a relatively safe investment. What some commercial property owners may not realize, is that sale-leasebacks also provide multiple benefits to the lessee. Here are a few of the key benefits the seller, as the lessee, can incur:

• An immediate cash infusion from the sale: the access to capital can be used to pay outstanding debts or as an investment into business expansion.
• Tax incentives: lease payments can be fully deductible as a business expense.
• Sustained use of the asset: despite the sale of the asset, business operations (and location) remain status quo through the continued use agreement.

A leaseback is especially attractive to capital-intensive industries such as retail, manufacturing and logistics. With the rise in interest rates, leasebacks are even more attractive as businesses are seeking alternatives to traditional financing.

What are the benefits to the lessor?

Apart from having a built-in tenant, most sale leasebacks are structured as triple net leases (NNN), meaning the tenant is financially responsible for:

• Net property taxes: Paying real estate taxes on the property, including any increases during the lease term.
• Net insurance: Maintaining and paying for property insurance, typically general liability and casualty coverage (as a minimum).
• Net maintenance: Responsible for all repairs to the property, including HVAC, plumbing and electrical, landscaping and parking.

While the lessee takes on some risk here, NNN leases are commonplace and provide a stable income stream for the lessor. The buyer can also depreciate the asset and claim tax deductions.

In the current market environment, sale-leasebacks are increasingly seen as risk-aversion strategies for both buyers and sellers. They are a mainstay strategy in CRE investments, but the key is structuring the terms of the lease in a way that benefits both parties, particularly over the long term.

Buyer beware

There are some instances when a leaseback may not be the right choice and should be given consideration before entering a sale-leaseback transaction:

1. The asset has significant appreciation potential
2. The seller’s creditworthiness is questionable
3. The business wants long-term control over the asset with flexibility