When do Sale-Leaseback Transactions Make Sense?

Posted on November 07, 2017

Sale leaseback transactions have grown steadily since 2010 as investors seek alternative financing options. In fact, total sale leaseback deal volume reached nearly $12 billion nationwide in 2015, a leap from $8 billion in 2007.

In a sale leaseback deal, a property owner sells a real estate asset, such as land, a building or other improved property, or both, and subsequently leases it back from the buyer. In essence, the seller becomes the buyer’s tenant, and the transaction functions as a loan payed out through an agreed-upon monthly rent. The leases are often long term and fixed to account for amortization of the purchase price plus a return on investment for the buyer.

 

For sellers, sale leaseback transactions provide the following advantages:

• Convert equity into cash, which sellers may put back into their business or invest in additional properties or another appreciable asset
• Avoid significant fees, such as points and appraisal fees, associated with a conventional mortgage
• Enter into an arrangement in which the buyer may finance a purchase with a low interest rate and pass on those savings to the seller in the form of lower lease payments
• Reduce income tax liabilities by fully deducting lease payments
• Use losses to offset capital gains
• Improve year-end balance sheet when the lease is classified as an operating lease and not considered to be a liability.

Advantages that property buyers may yield in a sale leaseback include:

• Predictable rate of return plus the benefit of any property appreciation
• A built-in, lease-paying tenant
• Availability of potential tax deductions and credits to offset a portion of rental income

 

The intricacies of sale leasebacks create significant tax implications for which both buyers and sellers should consult with qualified real-estate professionals and experienced accountants.

The professionals with Orion Real Estate Group work with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.