There is a way to unlock equity in your business without having to add debt to your balance sheet: Converting real estate assets into cash. Many business owners don’t think about it, but if they are making a lot of money through manufacturing and distribution, it is possible to unlock the equity in their building.
A sale-leaseback is a strategic tool that can allow your company to leverage your real estate equity as a source of financing, while still having full use of the facility in exchange for paying rent over a specified period of time. For the investor, a sale-leaseback provides an attractive investment option due to the long-term stability of income streams from these lease agreements.
It is appealing because there are benefits for both the buyers and the sellers:
- In most cases, little to no change in operating control of the facility.
- You negotiate the terms of the lease, including rent, lease, and renewal terms. You can also negotiate in terms that might work to your advantage, like pre-negotiated extensions and early termination options.
- It is a simplified transaction and a short closing process, compared to the typical loan process.
- There is an opportunity to monetize 100 percent of the value of the equity in your property by selling, versus the 70 to 80 percent Long Term Value that you may receive from financing the facility.
- Your company’s liquidity is improved by converting balance sheet long term asset value to cash.
- In most cases, you will be able to write off the entire lease payment as expense against earnings, thereby offering tax savings opportunities.
Benefits to the Investor
- In most cases, they are getting a strong credit tenant with low potential turnover.
- Hands-off ownership with a triple net lease.
- Residual value of the building.
- Secure, predictable, long-term cash flow.
You will need to consider the potential effect the transaction may have on your financial statements. The first step is to work with your advisor to determine if your potential lease would be considered an operating lease or a capital lease. Since the two lease classifications are treated differently, for both financial statement and tax purposes, it is important to understand the implications of your specific lease classification.
Properly structured, a sale-leaseback transaction could effectively utilize your company’s real estate assets as a financing tool, though the decision should be made only after the thorough analysis and comparison of your options. It is important to work with an experienced team of CPAs, attorneys, and commercial real estate advisors to structure a deal that best meets your requirements. If you decide to pursue the sale-leaseback option, it is also important that your commercial real estate advisor reaches out to the universe of qualified, special purpose investors that will provide a market price for the real estate and negotiate a market lease with your team.
Over the past few years, sale-leasebacks have become increasingly popular as an alternative to structured debt financing because they can provide your company with excellent financing options for growth and expansion, as well as a partial exit strategy.
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