In the world of real estate and finance, a sale leaseback transaction is a powerful tool that allows owner-users to unlock capital tied up in their real estate assets while retaining the operational benefits of the property. This article will provide a high-level overview of the sale leaseback process for potential sellers, shedding light on its benefits and considerations while illustrating the need for an experienced advisor working on the seller's behalf to maximize the economic terms and execution certainty of the sale leaseback.
What is a Sale Leaseback?
A sale leaseback is a financial transaction in which an owner-user sells their property to a real estate investor and simultaneously leases it back from the new owner. Essentially, the property owner sells the building and becomes a tenant while continuing to occupy and operate the property for their business needs. This arrangement enables the seller to access the equity tied up in their property at an attractive valuation and cost of capital, which they can then reinvest into their core operating business, use to pay down debt, or use to fund other strategic initiatives. Note: the sale leaseback is also a powerful tool during a live M&A transaction, stay tuned for an article that will provide an overview of the M&A sale leaseback process.
Key Benefits for Sellers:
Timeline:
At this point, you might be wondering about the timeline required for a sale leaseback transaction. While it can range from as short as 30 days for a quick-turnaround, off-market, expedited sale leaseback process, the standard sale leaseback process takes about 13 weeks from start to finish. The below chart provides an illustration of this process broken up into each major stage of the transaction:
What is a Sale Leaseback?
A sale leaseback is a financial transaction in which an owner-user sells their property to a real estate investor and simultaneously leases it back from the new owner. Essentially, the property owner sells the building and becomes a tenant while continuing to occupy and operate the property for their business needs. This arrangement enables the seller to access the equity tied up in their property at an attractive valuation and cost of capital, which they can then reinvest into their core operating business, use to pay down debt, or use to fund other strategic initiatives. Note: the sale leaseback is also a powerful tool during a live M&A transaction, stay tuned for an article that will provide an overview of the M&A sale leaseback process.
Key Benefits for Sellers:
- Liquidity Injection: The most prominent benefit of a sale leaseback is the immediate injection of capital unlocked by the sale leaseback. By converting real estate equity into cash at 100% of market valuation, businesses can reinvest in growth, pay down debt, fund expansions, or seize strategic opportunities that require liquidity.
- Operational Control: Sellers maintain operational control of the property, allowing them to continue using it as before without disruption. This is particularly valuable for businesses reliant on specific mission-critical locations or specialized facilities.
- Balance Sheet Improvement: By offloading property ownership, a company can strengthen its balance sheet, improving financial ratios and enhancing its credit profile.
- Partner for Future Growth: Sale leasebacks provide a business with a non-dilutive capital partner who will look to finance future growth including facility expansions, build-to-suits, and even add-on investments.
- Lease Terms: The lease terms, including duration, rental rate, and tenant/landlord responsibilities, should be carefully negotiated to ensure they align with the seller's long-term goals in mind.
- Rental Payments: The seller must budget for lease payments, which could affect their cash flow. It's important to assess whether the rental obligations are sustainable for the business and set rents accordingly, with healthy occupancy costs and rent coverage metrics in mind.
- Due Diligence: Sellers and their advisors should conduct thorough due diligence on the buyer or investor to ensure they are reputable and will be a good long-term partner for the business.
- Legal and Tax Implications: Consult with legal and tax professionals to navigate the complexities of sale leaseback transactions. Structuring the deal correctly is crucial to realizing the intended benefits without major surprises in terms of accounting treatment and tax impacts.
- Exit Strategy: Sellers should consider their long-term plans for the property, including options for lease renewal or potential expansions at a later date.
Timeline:
At this point, you might be wondering about the timeline required for a sale leaseback transaction. While it can range from as short as 30 days for a quick-turnaround, off-market, expedited sale leaseback process, the standard sale leaseback process takes about 13 weeks from start to finish. The below chart provides an illustration of this process broken up into each major stage of the transaction:
Conclusion:
Sale leaseback transactions offer a strategic financial option for property owners seeking to unlock capital from their corporate real estate assets while maintaining operational control for their business. By carefully considering the benefits and considerations outlined above and working with experienced professionals, businesses can make informed decisions that align with their strategic, long-term objectives and financial goals. Sale leasebacks can be a valuable tool for businesses looking to optimize their capital structure and achieve sustainable growth.
If you are considering a sale leaseback for your corporate owned real estate, reach out to the Ascension Advisory team for a quick and accurate read on how a sale leaseback could be a fit for you.
Leave a Comment