Real Estate Law: How a Sale-Leaseback Works

A sale-leaseback is a real estate transaction where a business that owns and occupies a property sells it to another party and then leases it back. The seller can convert a non-paying asset into cash while still retaining the right to use it, an arrangement that allows the business to scale back its investment in assets that are not part of the core business, such as real estate and buildings. Other advantages are reviewed below.

The Business Retains Control Over the Property

The majority of sale-leaseback arrangements are structured as triple-net leases, so the lessee will pay taxes, insurance, and common area maintenance. They will have a similar degree of control over the property as they did when they owned it. The lessee can even include options that support future subleasing arrangements or expansion.

Seller Can Set Their Own Lease Terms

In addition to recouping their investment in the property, the seller/lessee can negotiate a favorable lease agreement with the party who buys the property. Once the lease expires after 10 to 15 years, the seller/tenant can negotiate extension options or discontinue the arrangement if a better opportunity arises.

There Can Be Significant Tax Savings

Lessees can generally write off all of their lease payments as expenses for income tax purposes. When they owned the building, the only available tax deductions were interest expense and depreciation.

There Are No Financial Covenants

The rules that govern real estate investment trusts prevent real estate assets from being actively managed, so there are few covenants in a sale-leaseback arrangement. This gives the company lessee with more control over its operations and business and can even lower risk in difficult operating conditions.

Businesses that own their own land may consider a sale-leaseback agreement when they need money to grow through acquisition or to purchase more facilities, equipment, and technology. When credit markets are tight, many companies do not have access to as much credit as they need to achieve growth objectives.

Sale-leaseback transactions can also be a strategic advantage. When interest rates are low, real estate values tend to rise while rents go down, so the business owners can sell their real estate for an attractive price and lock in a low rental rate for the long-term. There is both an infusion of cash and ongoing savings in rental costs.

Downsides of a Sale-Leaseback Agreement

Like most business transactions, there are potential downsides to a sale-leaseback agreement. By selling the property, you forfeit any future appreciation in the property’s value. You are also unable to sell the real estate as part of any future sale of the business. If you have owned the property for a significant period of time, you may incur a substantial tax impact.

If you are thinking about executing a sale-leaseback arrangement, working with an experienced real estate and business law attorney can help ensure that the terms of the arrangement are fair and support your long-term business goals. At Rosen Law LLC, we will provide you with legal advice and representation during all of your essential company transactions. To speak with an experienced real estate attorney today, please call (516) 437-3400.

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