A Surge of Sale-Leaseback Deals To Free Up Cash To Grow A Businesses?
As property values reach new heights in Miami, many businesses are selling their real estate to lease the property back from the buyer/investor. Known as sale-leaseback transactions, these deals are gaining popularity among companies looking to free up capital to reinvest in their business to generate higher returns. I often advice business owners to consider this option because it allows them to convert the equity value of its real estate into cash without disrupting their operation. Sale-leaseback transactions make sense from a capital-reinvestment, tax, balance sheet and cost-of-capital perspective.
Some of the benefits of doing a sale-leaseback transaction include:
- 100 Percent Financing—Sale-leaseback proceeds are equal to 100 percent of property value, in context to a loan, which only funds 65 percent to 75 percent of value.
- Improved Balance Sheet—By selling the real estate, the company is converting a long-term nonliquid asset into working capital. In addition, a mortgage appears on the balance sheet as a liability, while an operating lease does not.
- Off-Balance Sheet Transaction—No obligations are shown on the balance sheet, as sale-leaseback transactions receive operating lease treatment.
- Improved Income Statement—The real estate sale can reduce the negative impact of depreciation and interest on income statements.
- Access to Capital—The sale-leaseback capital received from the transaction can be deployed in core operations that yield higher returns than appreciation of real estate.
- Debt Reduction—The proceeds also can be used to pay down existing debt and eliminate future refinancing risk.
- Better Access to Long-Term Capital Markets—With an improved balance sheet and income statement, a company can improve its credit status and have better access to a variety of capital sources.
- Tax Benefits—By leasing its facility, a company can write off its entire rent payment, rather than only the interest portion of a mortgage payment.
- Maintain Control—The lease agreement is structured so that the tenant maintains full operating control over the space it occupies because it is designed to mirror ownership.
Source: Marcus & Millichap