As published in Scotsman Guide's Commercial Edition, May 2012.
The financial difficulties that en- gulfed the commercial real estate industry have forced property owners to go through tough negotiation processes to acquire financing. In this tighter lending climate, commercial mortgage brokers may find a viable route for their clients in sale-leaseback financing.
A sale-leaseback transaction allows a property owner to unlock equity in a property and convert that equity into cash. In addition, because of the tax benefits and the balance-sheet incentives of sale-leasebacks, even thriving institutions have been embracing the concept. Commercial mortgage brokers need to be aware of how these deals work to advise and maximize benefits for their clients.
The sale-leaseback process works as follows: The owner sells the land and improvements to a buyer. In conjunction with this transaction, the seller leases the property back from the buyer. The term of the lease often is anywhere from 10 years to 25 years. The seller typically can extend the lease beyond the primary term.
The lease structure between the two parties ordinarily is “triple-net” — aka an NNN lease. In this type of lease, the tenant agrees to pay all of the property’s operating expenses, real estate taxes and insurance. As a result, the investment is passive and requires minimal time and effort from the buyer.
Commercial mortgage brokers may have seen how sale-leasebacks have been successful in assisting municipalities, corporations and other institutions raise capital for different purposes such as:
Expansion or acquisitions;
Maximizing capital to investors;
Buying back of capital stock;
Improving liquidity and working-capital ratios;
Paying existing debts;
Buying out a partner; and
Self-financing of new operations.
A sale-leaseback transaction also benefits the seller-lessee because the lease is not recorded as debt on its balance sheet. In addition, the seller-lessee’s entire rental payment is deductible for the purpose of calculating taxable income.
Although most borrowing vehicles will only allow your client to unlock 50 percent to 75 percent of the property’s market value, a sale-leaseback can convert equity in a property into cash that’s equal to 100 percent of the market value.
There are a few drawbacks to going down the sale-leaseback road. To provide your clients with the full picture, make them aware that the seller-lessee loses on the possibility of future property appreciation. In addition, if there is a sale of a property with property appreciation, this will result in capital-gains taxation.
The mechanics of a sale-leaseback are simple, but the overall process of the transaction is complex. An error in the structuring of the lease can result in irreversible complications in the marketability of the property and accounting treatment.
For these reasons, commercial mortgage brokers should advise their clients to seek professional help in sale-leaseback transactions to ensure that the maximum benefits are achieved.
Stephen C. Counts is an associate at Calkain brokerage services. He is the third generation of a family of Florida real estate brokers and developers. Prior to joining Calkain Companies, Counts was in the Tampa, Fla., office of Colliers International
aluation and Advisory Services and was instrumental in the valuation of more than $470 million in commercial properties in his first year as an analyst. Reach him at Scounts@Calkain.com or (813) 282-6000.