A sale-and-leaseback is typically a commercial real estate transaction in which one party, often a corporation, sells its corporate real estate assets to another party, such as an institutional investor, or a real estate investment trust (REIT), and then leases the property back at a rental rate and lease term that is acceptable to the new investor/landlord. The lease term and rental rate are based on the new investor/landlord's financing costs, the lessee's credit rating, and a market rate of return, based on the initial cash investment by the new investor/landlord. At Flatrock Commercial Real Estate Group, LLC, we have extensive experience and knowledge on how to structure a sale/lease back for our clients. In some cases, when a client owns an asset through an acquisition or merger or simply changes the goals and objectives as it relates to the ownership of corporate real estate, we can provide our clients with a comprehensive financial analysis. With the network and relationships, we have established over the years, Flatrock Commercial Real Estate Group, LLC is well equipped to assemble the right investments groups for any particular asset.
The reasons and advantages for a seller/lessee are varied, but the most common are:
- Help finance expansion of the existing business, purchase new plant equipment, or invest in new business opportunities. A sale leaseback enables a corporation to access more capital than traditional financing methods. When the real estate is sold to an outside investor, the corporation receives 100% of the value of the property. Traditional financing is limited to a loan-to-value ratio or debt-coverage-ratio.
- Help pay down debt and improve the company's balance sheet.
- Help reduce the seller/lessee's business income tax liability caused by the appreciation in value (land only) of its corporate real estate assets. In addition, the seller/lessee as a tenant can deduct all rent payments as a legitimate business expense
- Helps limit risks associated with owning real estate such as cyclical market variations.
The advantages for an investor/landlord are:
- Fair return on the investment in the form of rent during the lease term, and ownership of a depreciable asset already occupied by a reliable tenant.
- Long-term, fully leased asset with a guaranteed income
For income-tax purposes, the investor/landlord can take an expense deduction for an investment in a depreciable property to allow for the recovery of the cost of the investment.