Is A Sale / Leaseback Good For You?

A sale / leaseback is a strategy in commercial real estate whereby a building owner / occupant sells the building to a third party and then leases it back from the new owner. There are different reasons why someone would consider this. We will discuss reasons from the perspective of both seller and buyer.

As a seller and owner / occupant of a building, you are running a business out of this building. You have a chunk of equity in the building that is essentially tied up in the real estate. Your business has a need for cash and you don’t want to borrow money from the bank. You know you can make a greater return on your money by putting it back into your business instead of waiting for the real estate to appreciate. It becomes an issue of the best alternative use of your money. So the solution is to sell that real estate to an investor and remain in the building and lease it back from that investor. You now have the working capital that you need without borrowing and you are still in your facility that works for your business. You might even be paying a lower total monthly cost than you were paying with a mortgage.

As an investor, you are interested in a certain cap rate or overall rate of return on your investment. You also want a stabilized cash flow for the foreseeable future, say 5-7-10 years out into the future. You want to know the seller (your new tenant) has a strong enough financial statement and credit history to make the risk worth it. You can buy the building and lock in a rent for possibly the next decade. This will allow you some cash flow and an opportunity to depreciate this asset to save more on taxes. There is also an opportunity for the real estate to appreciate in value over time. If leverage is used, returns can be augmented and income taxes can be minimized.

One creative way to do this is for someone in the company to buy the building personally and lease it back to the company. Many times this will be the owner. We see this when the owner of the company buys the building on his/her personal balance sheet and then leases it back to his / her company. The owner might use this just like any investor, to create equity as a personal investment and get a required rate of return. It works for the company using the building because the owner of the business and the owner of the real estate are essentially the same person.

One recent transaction done by one of our senior brokers was in Crystal Lake where a long time well known publishing company owned a 50,000 sq ft industrial building that had surplus warehouse space and a lot of office space. A buyer was found who needed the warehouse space for his business but not the office portion. That buyer bought the building and the publishing company (seller) leased back a portion of the office space. By doing so, all their equity was unlocked so that they could use it for other purposes.

If you know a business that is considering this option, we can do calculations that can help bring this possibility to light and look at the numbers to see if this is a worthwhile avenue to take. In today’s economy, many businesses are looking for working capital and a sale / leaseback provides an option.

By Bruce Kaplan and Kevin Kaplan, father and son, are a top broker team with Premier Commercial Realty in Lake in the Hills. They can be reached at brucek@premiercommercialrealty.com or kevink@premiercommercialrealty.com.