Main Content

Asset Management

Commercial property

Commercial investment properties have to be carefully managed to maintain engaged tenants, strong leases, the property’s condition and thereby maintain the property’s long term value.  Managing commercial properties properly requires time, knowledge of all the factors that can influence valuation and the expertise to combine all of these efforts.

Our services include any combination of complete physical property assessments, lease evaluation and summary, lease negotiations, management of third party contract services, collecting rents, paying expenses, providing financial statements and any other services that are required to enhance the value of the investment property.

The Sale – Leaseback of Commercial Property Originally published in Inside Business

Jonathan Guion, SIOR
Jonathan Commercial Properties

In a sale – leaseback transaction of commercial property, a business owner sells the real estate that it occupies to a third party private investor. As part of the sale, the property is then leased back to the business for a mutually agreed upon period of time and lease rate.

Why do a sale – leaseback? A sale – leaseback transaction does provide many advantages for the business selling the property. These advantages include:

  1. Continuing control, yet flexible use of the property
  2. Freeing up capital currently tied up in the real estate
  3. Flexible alternative to standard mortgage financing
  4. Improving the business’ credit standing

For most business owners, the continuing control and use of the property is the most important consideration in this type of transaction. Having a place to operate the business and controlling the lease terms of the location are critical to a business’ long term success. Because the seller leases back the property anywhere from seven to thirty years, the seller can maintain control of the property for a period of time that works within their own business plan. Large corporations, as well as small growth companies, are revisiting their real estate strategies in an attempt to create additional flexibility. Leasing, verses owning, property can allow business owners to have greater flexibility in their business strategies through shorter lease commitments and/or extended renewal options. Lease flexibility allows the business’ real estate to grow or contract along with the business’ changing needs.

One of the most important reasons to utilize a sale – leaseback transaction is to free up capital. Illiquid assets that are locked in real estate can be released and that capital can be utilized for other more profitable initiatives within the business. Most growth companies expect a capital return from their business in the range of 15-20%. Typical commercial real estate has returns on capital between 8-11% which means that often the money can be better invested with a higher rate of return in the company’s primary business.

A sale – leaseback transaction also provides an excellent alternative to standard mortgage financing for many reasons. Commercial mortgages normally have “calls” or “balloons” at the end of five or seven years in which the terms are open to renegotiation by the lender. A thirty year lease term, at pre-arranged lease rates, can provide long-term stability for a business leasing a property. In a sale – leaseback transaction, the seller also receives 100% of the property’s value in cash to reinvest in the business, versus the 70% – 80% of the value normally provided as a condition of the typical mortgage. Often times, the property can also command a premium sales price because the value of the property is based on the rental stream as an investment, rather than the bricks and mortar as a user occupied property.

National retailers often use the sale – leaseback scenario to finance ongoing expansions for additional stores. The capital requirements of opening several hundred stores can be astronomical and over burden a company with debt very quickly. By doing sale – leaseback transactions these companies can control the property and still reinvest their capital for the growth of their business.

Sale – leasebacks are also used frequently to help businesses improve their credit standing. The sale of a property turns a fixed asset into working capital. Moving the real estate off the balance sheet reduces the company’s debt, which immediately impacts its current ratio. By improving the current ratio, many businesses are able to eliminate restrictions on traditional lender borrowing. This may allow for the purchase of additional machinery or inventory that will allow for continued growth. The combination of turning real estate equity into working capital and reducing the current ratio can often time dramatically change the health of a business.

From a competitive business and financial analysis standpoint, undervalued real estate on the books is also a primary target for takeover attempts. Additionally, if a property is fairly close to being fully depreciated, a sale – leaseback can be beneficial because the lease expense is usually fully deductible and can thereby replace the lost deductions that were available through depreciation.

Sale – leaseback transactions can have many advantages, but at the same time, the seller needs to watch out for several hurdles. First and foremost, there are some accounting standards that need to be adhered to in the transaction. Secondly, the lease must meet the standards of an “operating lease” to be deductible as an expense. Finally, the tax implications of doing a sale – leaseback transaction must be carefully analyzed to assure that the transaction is beneficial for all parties involved in the sale.

The sale – leaseback transaction is a successful property strategy for a wide range of businesses. The continuing control of the property, freeing up of capital, and improving the financial statement can often make the difference between continued growth and stagnant operations. Careful analysis can help you determine if a sale – leaseback will benefit your business.