Oct 28, 2022

What is a Sale-Leaseback?

A sale-leaseback can be a lucrative option for both buyers and sellers of commercial real estate. If you want to learn more about sale-leaseback transactions and what one could mean for you, you’ve come to the right place.

In this article, we’ve outlined some of the most important things you should know about sale-leaseback transactions, including:

  • What is a sale-leaseback?
  • Pros and cons for the seller
  • Pros and cons for the buyer

What is a Sale-Leaseback?

A sale-leaseback (SLB) is a transaction where the owner of a building sells the property and simultaneously leases it back from the new owner. In this case, the seller becomes the property’s tenant and the buyer becomes the landlord. We’ll use these terms interchangeably throughout this article.

The majority of SLB transactions are done with net lease properties where the tenant is responsible for paying base rent in addition to taxes, insurance, maintenance, and utilities. Many SLB agreements also include an option for the seller to repurchase the property at the end of the lease, or the right to renew the lease for a longer term if needed.

The leasing and purchase agreement are typically negotiated simultaneously during an SLB, allowing for a smooth transition. While an SLB could be done with a multi-tenant property, they are most commonly done with single-tenant properties where the seller occupies the entire space.

Benefits for the Seller

A Sale-Leaseback can be a very beneficial option for the seller. We’ve outlined the most important benefits of a SLBs for the seller below.

Benefits

Free Up Capital

From a monetary perspective, an SLB gives the seller an opportunity to free up capital currently tied up as equity in the property. By selling the property to a third party and receiving that equity in return, the seller can reallocate the capital to growing its business or paying off debt rather than funding the real estate it resides in.

Potential Balance Sheet and Tax Benefits

Sellers will want to consult with an accounting professional prior to entering an SLB agreement for balance sheet or tax benefits, but this type of transaction does hold some potential for both in some situations. Sellers are able to replace a fixed asset with a current asset, and switching from mortgage payments to lease payments can be beneficial in some situations.

Benefits for the Buyer

Of course, no Sale-Leaseback transaction would be complete without a buyer, so we’ve taken the time to outline the primary benefits from the buyer’s perspective as well.

Benefits

Long-Term Tenant from Day One

The goal of most commercial real estate investors is to secure a long-term tenant for a property, and an SLB transaction achieves that goal from day one.

Property Appreciation and Depreciation

These drawbacks from the seller’s perspective are a benefit from the buyer’s. Assuming the property is in an appreciating area and market conditions remain strong, an SLB can help buyers benefit from a property’s appreciation in the same way that a more traditional purchase can. The buyer will also be able to benefit from depreciation in the same way they would be able to with other real estate assets.

Access to Owner-Occupied Properties

A unique benefit of an SLB is that it allows buyers to pursue owner-occupied properties. Normally these properties are outside the scope of potential investments due to their non-traditional nature, but an SLB allows a property to break into this property type and benefit from the stability that owner-occupied properties can offer.

Conclusion

We hope this article gives you a thorough understanding of what a sale-leaseback is and what benefits you can expect to face depending on which side of the deal you are on.

Our team has helped numerous clients successfully navigate SLBs, and we’d love to help you as well. If you’d like to learn more about SLBs or want to speak to our team about pursuing an SLB of your own, please feel free to reach out.

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