How to Unlock Value and Increase Returns for Real Estate: Sale Leaseback Transactions and Finding the Right Partner
As an entrepreneur, maximizing the performance of your business is always top of mind. Unearthing these opportunities through real estate can be a game changer. In this article, we identify 8 key reasons why business owners opt in to a sale leaseback transaction.
What is a Sale Leaseback?
Sale leasebacks are a financial strategy wherein a business owner sells an asset, and then leases it back long term. They are an attractive option for a corporation to raise funds, increase earnings, and enhance liquidity from their real estate holdings.
A sale leaseback transaction also improves the company’s balance sheet to the extent that the value of the property exceeds its book basis. It also reduces exposure and lowers risk in the event of downward market shifts, thereby locking in gains while the real estate market is up.
Through a sale leaseback, a business can continue to use a critical asset, without having to own it. This type of transaction allows businesses to remain in control of their real estate for the long term, without impacting operations.
8 Reasons to Engage in a Sale Leaseback
If your business generates a higher return through operations than it does in real estate, a sale leaseback may be an opportunity worth seizing. Here are 8 key reasons why business owners choose to engage a sale leaseback:
Reveal hidden equity and generate cash. Liquidate your real estate and obtain 100% of market value where traditional financing offers only a percentage of the asset’s value, typically 65%-75% loan to value (LTV).
Reduce taxes. Deduct 100% of your rent expense versus only the interest portion of your debt service.
Reinvest capital for growth. Use the proceeds to strategically reinvest in your business which generates higher yields.
Retain control of real estate through a triple-net lease. Your business has full control of the real estate through leasehold rights
Retain operating flexibility with a partner who supports future expansion without having to invest capital into real estate.
Generate a more attractive sales offering than a vacant building. Typically, asset prices are higher for sale leasebacks than for a vacant property.
Lower risk in the event of a downward market shift. Consequently, lock in gains while the real estate market is up and reduce exposure to downturns.
Mitigate risks associated with ownership. These include hazards, depreciation, liability issues, and more.
Disadvantages of a Sale Leaseback
While we’ve identified opportunities aligned with sale leaseback transactions, it’s only fair to cover the possible shortcomings as well.
No claim to appreciation. Once you sell the property, you’ve locked in the asset’s price - for better or for worse. While the property’s value may increase, you’ve relinquished your entitlement to any additional earnings, which could mean a lost investment opportunity.
Possible limitations regarding customization. If you wanted to truly make the space your own, certain modifications may not be permitted as a tenant.
Short term loss in EBIDTA. Deeds, early termination of old financing, lease payments, and other factors must be calculated before completing the transaction.
Connecting with the Right Real Estate Private Equity Partner
Sale leaseback opportunities allow business owners to convert real estate assets into capital for business expansion, succession planning, ownership consolidation, acquisitions and other major business needs. With the right real estate partner and the right circumstances, this type of financial transaction can be a win-win-win scenario. You get the cash to run your business while still being able to utilize the asset, and the property owner can now count on a steady payment.
Finding the right partner is imperative to growth and expansion. Too often, entrepreneurs sell their business as one entity without unlocking the opportunities of separating the property from the business. If you think that selling your real estate before selling your business may be an attractive option for you, simply start a conversation with Borgman Capital. We can help you to see the big picture - that is, the full potential of both assets as individuals - and guide you in a direction that feels right to you.
Learn more about Borgman Capital Real Estate here.