Businesses that have capital tied up in real estate, with a strong need to get at it, have an intriguing option open to them. Selling the property, and leasing the facility back from the new owner. It can create a mound of on-hand cash, and by making the lease terms long enough, and due to tax deductibility, the lease can amortize nicely over the life of the lease, while letting the business retire a bunch of debt. Particularly in cases where the business has an uncapped adjustable rate mortgage, or loan on existing equipment that's about to spike in its monthly payments, this is a good option to save money over the long haul.
In terms of cash flow processing, a sale to leaseback provides around 80% to 100% financing to the business owner doing the sale, for the purchaser, the property and the long term lease mean that there's a solid revenue stream coming in. (Depending on the local commercial real estate market, the sale/leaseback situation can multiply equity by up to 3 to 5 times, if business has grown around the area of your physical facility.) Make sure that any lease that's built is structured as an operating lease, rather than a capital lease. This helps the utilization of the lease agreement to remove long term and short term debt tied to the real estate in question, and removes the asset from the balance sheet.
It's this last asset that helps a lot of businesses; by removing the major asset "off the books", the business can show a higher return on its total assets, and can use its accumulated equity to fund expansions in its core (and more profitable) business. Right now, the market strongly favors sales/leaseback agreements from a sales point of view, in particular with businesses that rely heavily on liquid credit, that are feeling a crunch. This is making sales/leaseback arrangements much more appealing to businesses with lots of warehouse space, trying to turn product over for cash. It's also appealing to retail stores - any business that has to constantly reinvest in inventory can use a sales/leaseback aggressively, and often on better terms than taking out a loan secured by inventory, or against future invoices.
When doing the accounting to set up a sale-to-leaseback option, the purchase price of the building, less the net of any accumulated depreciation needs to be tallied up; a property purchased for $3 million 10 years ago may have depreciated to a net book value of considerably less - even if the current market price is significantly higher. When considering a sale/leaseback, the key characteristics are the equity/debt ratio, and return-on-assets ratio. Make sure you understand both of them before making this decision, and make sure you understand current market conditions.
Options As An Investor
In the current market conditions (where there are lots of investors, coupled with highly liquid money) a sales/leaseback arrangement can be a viable alternative to offering stock, or raising debt to fund expansion, and it strongly favors the seller.
If you're looking to invest in a sales/leaseback arrangement, there are some traditional favored properties, or triple net deals, where there's a single tenant who pays the real estate taxes and maintenance. Good example of this type of property is major retail and restaurant chains. These major retail stores and restaurant properties offer a traditional steady revenue stream, and they're usually located in good traffic hubs. They're easy to understand for most investors.
Unfortunately, these properties are becoming harder to find, and a successful investor needs to hunt a little further, looking into campgrounds and industrial buildings. These properties have a bit more risk - it's hard to predict how their performance will run over the next 10-20 years. It's important to do proper due diligence on these arrangements, but this is a market that's fairly easy to turn a profit on, if you can afford the typical $1 to $3 million for the payment terms.
When structuring a sales/leaseback agreement as an investor, you need to assess both how the debt market is going to change, and what the income potential of your tenant is. Use the standard cap rate formulas to determine how quickly your lease payments will recover your initial investment - and, in a market where good commercial turns are possible, don't be afraid to re-sell if you can.
Sales leaseback opportunities can be very advantageous to the seller and the commercial real estate investor. Consider putting this strategy in your tool belt to raise money for your business now by selling with a lease back agreement, or make a steady income as an investor, while reaping future rewards as "equity happens".
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