Sale/Leasebacks

Many areas are using sale/leaseback agreements to meet the real estate needs of companies. An excellent article on the subject appeared in a recent issue of Area Development Magazine. If this is a subject of interest, you may wish to read the article from April 25, 2005.

From Area Development:

"A sale/leaseback is a financial strategy that gives you an opportunity to raise cash and improve your balance sheet. A sale/leaseback takes place when a business sells real estate it already owns to a third party for fair market value (the "sale"), and then immediately enters into a long-term net lease and continues to occupy the property (the "leaseback"). If the transaction is structured as a triple net lease, the tenant continues to be responsible for maintenance, utilities, and insurance, therefore retaining control of the property. In entering into a sale/leaseback agreement, you are paid fair market value for your property, which provides cash to expand operations, pay down existing debt, create liquidity, and/or substantially improve your balance sheet and financial ratios.

A sale/leaseback essentially provides 100 percent financing to the business owner. A company looking to build a new facility does not have to tie up cash in the form of the 25 percent or more "down payment" typically required by commercial banks. Further, the entire lease payment is tax deductible, as compared to a traditional mortgage where only the interest portion of the loan payment is deductible. If a company already owns its real estate, it can "unlock" the equity in the property and turn that equity into cash. The original purchase price of a building, its cost, net of accumulated depreciation, is shown on the balance sheet. A property that was purchased for $3 million 10 years ago is shown at a net book value of $2.25 million on the balance sheet, but may have a current market value of $7 million. A sale/leaseback on that property would replace the $2.25 million asset on the balance sheet with an asset of $7 million in cash."