Sale-Leaseback
What is a sale leaseback? I understand it is when the same seller of the space / property leases back a that same space / property, but what are the benefits for both parties? Example if possible? Thanks.
Owner/User needs cash for whatever reason, or are tired of maintaining the property, but they still need space. So they sell the building and lease it back. Leasebacks are typically 10+ years, so the owner benefits by getting a cash flowing property.
Example: association owns a building in a core urban market that is ripe for redevelopment. Association is not an expert at running a commercial building and wants to free up cash on their balance sheet to pursue association-related BS. They do a sale-leaseback with a developer whereby they collect major cash proceeds based on the redevelopment potential and buy some time to find a new HQ to lease...developer gets the benefit of some short term cash flow in the building while they get the site entitled and ready for construction.
Companies can do for a variety of reasons. Development scenario above is a good example. A lot of times it is a financing technique for companies. If the market for their debt or equity isn't conducive to borrowing or issuing stock, liquidating assets (real estate) can be an appealing way to free up some cash to invest in your business. Also, the public markets can penalize companies for having resources tied up in assets that aren't core to their business, which would make it favorable to lease your real estate and invest the proceeds in growing your business (or even returning capital to shareholders).
I have a great example of one I saw not too long ago.
A doctor owned his own building and had for a number of years and carried no debt on the property. It was in a great location, very profitable, but was in desperate need of repairs. Since his business was making so much money off the location, he decided to write a lease at an above market rate and proceeded to list the building for sale. At market rates, his property would have only been worth around $4m, but with his above market rates, he was able to sell it for $7m. He rolled $1m of that back into his office for repairs, and is now able to write off nearly all expenses related to the property. No word on what he did with the extra $$$.
Sale and leaseback transactions can also be profitable in the same way that renting a house may actually be more profitable than buying. If real estate in the area is only appreciating at 3%, it may make sense to roll your money into a higher yielding asset.
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