Key takeaways
- A sale leaseback in real estate is where a company sells its property to an investor, then leases it, becoming the lessee.
- Pros of a leaseback agreement include increasing capital, maintaining control, and fostering long-term relationships.
- Cons of leaseback contracts include tax liabilities and loss of benefits such as appreciation forfeiture.
- To decide whether a sale leaseback is right for you, consult a licensed real estate broker.
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In the world of real estate investing, investors are always exploring strategies to increase their returns. A sale leaseback in real estate is one strategy that has gained significant popularity.
A sale leaseback transaction allows property owners to unlock the value of their real estate assets — while retaining the use and occupancy of the property. In this blog post, we dive into what sale leasebacks are, some real-world examples, and their benefits for investors
In this post, discover:
- What is a sale leaseback in real estate?
- Who qualifies for a sale leaseback?
- Pros of real estate sale leasebacks
- Cons of real estate sale leasebacks
- Should you enter a leaseback transaction?
What is a sale leaseback in real estate?
A sale leaseback financial transaction is where a company sells its property to an investor before then entering a lease with that new property owner. So, the owner sells the property to an investor while continuing to occupy it. As a result, the seller becomes the lessee and the buyer becomes the lessor.
Despite popular assumption, not all sale leasebacks are dealt in cash – though they can be. Further, settlements may also include an equity exchange or other nonmonetary transactions.
What is the purpose of a real estate sale leaseback?
The main purpose of a leaseback agreement is to achieve cash flow.
Cash flow in real estate is the movement of money in and out of your property. It measures the income of your property and the money you spend maintaining your property.
For instance, if your commercial company needs immediate capital, a sale leaseback transaction can be a quick way to deliver. Many companies use the incoming capital to start a new project, finalize a partnership, or bail themselves out of a difficult financial situation.
Who qualifies for a sale leaseback?
Not only do you need to make sure that a leaseback agreement is right for you, but you also have to figure out if you qualify. While there aren’t a lot of requirements for a commercial company to apply, they’re still expected to meet certain criteria.
In order for a company to qualify for a sale leaseback agreement they need to:
- Commit to operations. Most investors aren’t interested in running the property themselves. They’ll want to know that their lessee is willing to commit to controlling operations for a long period of time.
- Own the property. Obviously, you can’t apply for a real estate leaseback if you don’t actually own the property. This includes commercial buildings, multifamily properties, and more.
- Have a credit profile. Investors want to know that the property they are putting money into will yield results. So, be sure to have a credit profile put together before putting in an application.
Pros of a real estate sale leasebacks
There are quite a few benefits of a sale leaseback, and they mostly center around available capital. Before you can make a decision, it’s important to understand what you might get out of a contract before you sign.
The biggest pros of a leaseback agreement include:
Increasing working capital
The possibility of increasing working capital is what makes real estate leaseback agreements so popular. With the help of a real estate professional that understands these kinds of contracts, you can easily access capital that’s been previously tied up.
Maintaining property control
If your biggest fear about selling is the lack of control you’ll have over the property, then we’re here to set your mind at ease. Most sale leaseback agreements operate under a triple net lease (NNN) agreement.
This means that you’ll still maintain a degree of control over decisions while reducing your overall.
Keep in mind, there are many factors to consider about NNN leases. But suffice it to say, it’s usually favorable to the lessee.
Long-term investment relationships
If you play your cards right and establish a solid reputation with the investor that purchases your property, then you’re in for a long-term capital relationship.
Many sale leaseback agreements include several years on the contract, meaning you’ll have plenty of time to achieve steady capital. Furthermore, these kinds of contracts often open opportunities for further business in multifamily investment over the years.
Discovery more about commercial real estate investing:
Cons of real estate sale leasebacks
While the aforementioned pros give you a picture of what you can expect to gain, the cons of real estate sale leasebacks flesh out that picture more fully. After all, you cannot make an informed decision if you don’t also know the risks.
Cons of real estate sale leasebacks include:
Tax liabilities
Many tax responsibilities can come with capital gains, especially if you aren’t aware of how to defer capital gain taxes.
Moreover, real estate tax in general is a complicated beast that can catch even the most knowledgeable professional off guard. So, it’s critical to hire a well-informed, skillful broker.
Loss of benefits
Depreciation and appreciation of benefits come and go with property ownership. In fact, these can often be seen as the highlights of ownership after a certain amount of time in the market.
When you sign a sale leaseback, you could be forfeiting potential benefits for either of these events. Ultimately, it’s up to you to weigh the advantages versus the disadvantages of giving up these benefits.
Should you enter a leaseback transaction?
So, now that you have the basic information about sale leaseback contracts, the question remains: Should you enter one?
On one hand, the benefits of attaining capital quickly are a large advantage depending on your business’s circumstances. It can take a lot of financial pressure off of you while also paving the way for strong investment potential.
On the other hand, you also run the risk of giving up certain benefits in exchange for a more immediate payout.
Before making a final decision, listen to the advice of real estate brokers that have a stronger understanding of the market and of your unique property.
