What is a Sale-Leaseback
A leaseback is an arrangement in which a company that sells an asset can lease back that same asset from the purchaser. The purchase price and lease terms are agreed upon by the company and the purchaser prior to completion of the sale.
Benefits to the Seller
The seller benefits by receiving an immediate infusion of cash upon the execution of the Sale-Leaseback and maintaining full use of their asset. This allows the seller to raise capital and maintain use of their asset; the best of both worlds! Further, a Sale-Leaseback is neither debt or equity financing. With a Sale-Leaseback, the company doesn’t increase their debt load, but rather gains access to needed capital through the sale of an asset.
Benefit to the Buyer
The buyer benefits from receiving a fair return on their investment and a guaranteed lease. In addition, the buyer often has access to lower-cost capital which allows the real estate to become more profitable. Through scale of operations, the buyer may also be able to improve the operating efficiency of the asset.
An example of Sale-Leaseback is shown below:
Jamie owns a 10,000 square foot manufacturing facility which her metal fabrication company uses for operations. Her company is doing well and she needs to invest $500,000 in additional equipment and working capital. Rather than obtain an additional loan from her bank, she chooses to work with Bartlett Capital Group on a Sale Leaseback.
- Jamie determines a reasonable lease payment for her property is $40,000 per year and that she would like to keep her business in the property for 10 years.
- However, she also wants the flexibility to move her business after 5 years.
- Bartlett Capital Group purchases Jamie’s building for $500,000 in cash, which Jamie can use however she would like (unlike some bank loans with restrictive covenants).
- Jamie and Bartlett Capital Group enter into a 5 year lease that also includes an option for Jamie to extend the lease for an additional 5 years with modest rent increases to account for inflation.
Summary
Jamie (Business Owner and Seller) has improved the growth outlook for her business through a major investment in equipment and growth as well as improved the flexibility of the business by retaining the property for up to 10 years with the option to leave after 5. The buyers purchased a quality building from a reliable business owner and will receive fair lease payments for at least 5 years. If Jamie chooses to move her business after 5 years, the buyers are confident they will be able to re-lease the property to a different business.
