What is a sale and leaseback?

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A sale and leaseback is an arrangement that permits a buyer to take an asset from the seller through the sale of commercial property and the lessee – the Seller of the property – as the option of buying it back again at some future date, typically at a fixed purchase price.

An obvious condition of selling the property and leasing it back is – You must be the freeholder of the property or have a Virtual Freehold.

The most common reasons for using a sale and leaseback are:

  1. Selling your existing property to make land/property improvements or for other purposes (such as expanding your business)
  2. A seller who can’t afford to keep his or her property up to date but needs cash fast and still run the business from the premises.
  3. Tax planning (such as when buying commercial property for passive income).
  4. A buyer who can’t afford to buy an existing property outright but is looking for business premises on a long-term basis (However, these arrangements are rare).

What are the benefits of a sale and leaseback?

If you own a commercial property, then you might wonder whether it would be more beneficial to sell it and then lease it back to the same party or to lease it back to a different party. The answer depends on several factors that are often overlooked, such as the owner’s long-term financial situation, as well as the terms of the sale and leaseback.

If you have an understanding of accounting principles, have done your due diligence on the seller’s financial condition, and are able to fully disclose your financial position to the buyer (so that any questions about your finances come from the buyer), then a sale and leaseback is an excellent option for both sides. However, this is not always possible. For example:

  • You may not be able to fully disclose your financial situation for the sale and leaseback deal to work – ie other debts you may have that swallow up your cash flow needed for the business.
  • It converts property assets into capital without the need for the occupier to lose control of the building they occupy
  • Your business income may not meet your lease obligations
  • The buyer may be financing their purchase with an illegal mortgage – they may state they are buying premises for their own purposes.
  • The bank or other lender might require that the property must be occupied by the buyer and a specified number of employees.

Who is the typical buyer in a sale and leaseback transaction?

Many people have an idea of what a commercial property is, but very few people have a clear idea of who is the typical buyer.

A recent study by the National Association of Property Buyers (NAPB) found that the typical buyer in a sale and leaseback transaction was male and over the age of 55 years old, using their pension funds.

The study also found that: — The average net cash value for purchase through a sale and leaseback investment was £450,000. — 13% of owners received cash from the seller before they bought the property as a loan, deducted from the purchase price on completion.

I’m sure you can see where this is going… 🙂 You don’t need to be an accountant or genius to understand this stuff, but it does make for good fodder for some great conversations with your friends and family about how to raise finance to run your business and have cash in the bank.

Who is the typical seller in a sale and leaseback transaction?

In a sale and leaseback transaction, the seller typically buys the business premises at an attractive price (often substantially lower than what it would cost to buy it as an outright transaction) but then leases it back to the seller.

This can avoid excessive capital costs and/or having to carry a long-term lease moving to new premises if the property is sold to raise capital to run the business.

In a sale and leaseback transaction, this often means selling the property at a lower price in order to generate cash fast.

There are three main reasons why sellers sell their commercial property to lease back:

  • Cashflow: A cash injection is needed into the business to run the day-to-day operations.
  • Investment: A loan from the bank may not be suitable or just too expensive and a leaseback arrangement allows a strong investment into the property and the seller agrees to buy the property back at a higher price in the future when the business has met expectations.
  • Retirement: Many business owners sell and lease back their commercial premises a decade earlier to wind the business down and have ‘cash in the bank’ as part of their pension fund.
  • The steps involved in a sale and leaseback transaction: There’s no way I’d ever recommend doing this yourself! When you’re dealing with commercial properties it’s important that you seek independent advice first. Contact an experienced commercial property lawyer.

What companies and properties are suitable for sale and leaseback deals?

  • Properties with a single occupier
  • Properties including offices, retail and industrial
  • Companies with a decent trading history and a healthy balance sheet will get a better capital sum from an investor
  • Tenants who are willing to enter into leases of at least five years or more at or around prevailing market rent

How does a sale and leaseback work?

A sale and leaseback is a way of purchasing commercial property for a fixed period of time with the intention of selling it on at the end.

A sale and leaseback is an extremely popular option for those wishing to utilise their pension schemes, especially when they are acquiring assets as part of an overall pension strategy.

A sale and leaseback work well when:

  • The buyer wants to pay off a long-term debt (such as a mortgage or other kinds of loans secured by land) quicker than traditional methods such as selling with a Commercial Agent.
  • The buyer is buying commercial property as part of their pension fund.
  • The seller wants to sell quickly but hasn’t been able to find any buyers who will pay market value for their property

This type of transaction is also sometimes referred to as “sell/leaseback”, “sale/leaseback” or “short sale/leaseback”.

What are the key considerations in a sale and leaseback transaction?

A sale and leaseback can be a very lucrative transaction for both the buyer and seller since it allows the seller to close the deal in a relatively short period of time. The seller doesn’t have to move business premises and the buyer has a readymade tenant.

The sale and leaseback also give buyers access to pension tax breaks and other benefits such as lower interest rates on loans. A final benefit that buyers get is flexibility: they are not tied down by any vendor or developer and can move quickly between them.