What does sale and leaseback mean in the real estate market?

In a sale and lease back transaction , assets such as a company's real estate are sold to a leasing company or an investor . In addition to real estate, these assets can also include vehicles, machinery, IT equipment, or office furnishings—in principle, anything that is considered a movable or immovable asset. The leasing company or investor purchases the asset at a determined price and then leases it back to the seller. in principle , anything that counts as a mobile or fixed asset. The leasing company or investor purchases the asset at a determined price, and the seller can then reacquire the rights of use for the assets in return for a rental or leasing fee. This means that ownership is transferred to the buyer, but the seller retains the rights of possession. A leasing company is a specialist in the purchase of leased assets. It therefore pays particular attention to the condition of the asset and purchases it below its current market value, i.e. at a low price, in order to take wear and tear into account.

In relation to real estate, this can work as follows: A company owns its premises and sells its real estate to an investor, receiving the sale price. It then leases the property back, usually for a long period of time, and can continue to use it but is no longer the owner.

 

What is sale and leaseback used for?

The sale and leaseback procedure is interesting for all companies that want to uncover hidden cash reserves . Production halls and administrative buildings in particular tie up large amounts of capital that can be freed up through the sale and leaseback procedure. In principle, it is a means of quickly raising liquidity and is used, among other things, in cases of creditworthiness problems or to free up capital for operational business. The process is often used when a company has to make unplanned payments to the tax authorities, inheritance or gift tax is due, large purchases of goods have to be pre-financed, or investments in new business models are pending—in short, the sale-and-lease-back process can be used to overcome crisis situations or even benefit company growth.

What are the advantages and disadvantages of sale and leaseback?

The sale and leaseback process has both advantages and disadvantages! We have listed these below:

Advantages:

• Quick liquidity: By selling a company's valuable assets to a leasing company or an investor, a company gains short-term liquidity. Since the assets can be leased or rented back immediately, there is no negative impact on the company. As a rule, a sale-and-lease-back process only takes three to six months, meaning that the company has the necessary liquid funds at its disposal within a short period of time.
• Bank-independent financing without collateral: Particularly practical: The sale-and-lease-back procedure offers the possibility of bank-independent financing without the need to provide collateral, as the property itself serves as collateral. In addition, the sale-and-lease-back procedure has no impact on existing credit lines and may simplify subsequent financing with credit institutions.
• Streamlining the balance sheet: Selling an asset reduces the assets side of the balance sheet and decreases liabilities. This also shortens the liabilities side of the balance sheet. This results in improved balance sheet ratios. If the capital generated by the sale of the property is also used to repay liabilities, the equity ratio can also be strengthened. In summary, the sale-and-lease-back procedure is therefore ideal for streamlining the balance sheet.
• Tax deductible: The sale-and-lease-back procedure offers a further advantage: The payment of the lease installments for the real estate is considered an operating expense and can therefore be deducted in full for tax purposes.
• Improved credit rating: Since the company generates capital income by selling the property to the leasing company, its profits are higher. This in turn increases creditworthiness and can have a positive effect in negotiations for large contracts or with banks
• No impact on operations: Since the seller can lease the property back from the new owners at the same time, there is no negative impact on operations. Day-to-day business can continue as usual within the company.

Disadvantages:

• Leasing fees: The principle of a leasing company is not only to provide capital, but also to generate profits. To achieve this, a leasing company or investor requires monthly fees calculated over the term of the contract in order to grant capital quickly.
• Fixed terms: Rental agreements are concluded for a fixed term. To make the business model really attractive for leasing companies, contracts are usually only concluded for long terms of 10 to 15 years. these are usually so-called triple net contracts. In addition to the rental costs, the lessee also pays all other costs, such as operating costs, maintenance costs, and repair costs.
• No late payments possible: Unlike banks, for example, which can react more flexibly, leasing companies or investors have no tolerance for late payments. If the rent is not paid for a period of time, the lease agreement can be terminated.
• Only interesting for large sums: For leasing companies or investors, a sale-and-lease-back purchase only becomes interesting when large sums are involved. The purchase is not profitable for amounts below six figures, as each purchase incurs numerous additional fees, such as appraisal costs.

Since the coronavirus pandemic, at the latest, it has become clear that business models need to be adapted or restructured time and again. Financial leeway is necessary to be able to take advantage of this opportunity. The sale-and-lease-back procedure is an excellent option for all companies that want to expand their financing options as quickly as possible in order to free up capital.