Sale Leaseback Financing

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In structuring sale-leaseback financing, an investor typically requires the tenant to sign a triple-net lease.  The triple net lease is usually a long-term and structured as an operating lease. The tenant in a sale-leaseback financing arrangement is responsible for the payment of property: taxes, maintenance, management and insurance. Most traditional residential and commercial rental properties, such as office buildings, apartments and mini-warehouses have multiple tenants and the real estate owner, not the tenant, must pay operating expenses, provide on-site management, and be responsible for periodically re-leasing all or part of the property.

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Sale-leaseback financing can be used for both existing and build-to-suit real estate. Regardless of the type of property you own, i.e. retail, office, industrial, educational buildings, health care, industrial facilities, service centers, distribution warehouses or fast-food establishments, you can fully benefit from clear advantages of sale-leaseback financing. Numerous privately and publicly held companies have employ this financing method successfully everyday.

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A triple net leasehold obligation that qualifies as an operating lease under the criteria set by the Financial Accounting Standards Board (FASB) will not appear on the tenant’s balance sheet as either debt or a long-term obligation. Therefore, after paying off mortgage obligations and receiving unlocked cash from the sale of the seller/tenant’s depreciated real estate, the seller/tenant will not add a new leasehold debt to their balance sheet. The improved debt-to-equity ratio can make a seller/tenant much more attractive to banks and other traditional lenders.

A sale-leaseback, structured properly with an operating lease, in addition to expense reduction and the conversion of the seller/tenant’s illiquid real estate assets to capital, can provide the seller/tenant company with the following business advantages:

1. 100% financing based on the appraised value of the property

2. Operating leases that do not appear on the tenant’s balance sheet as debt or as a long-term lease obligation

3. Full control of the tenant’s real estate under lease provisions

4. Tax deductible lease payments

5. Cash realized from the sale-leaseback transactions that can be used to enhance liquidity, expand operations, acquire other businesses, reduce debt, invest in 1031 exchanges, etc.

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In structuring sale-leaseback financing, a prospective investor enters into a long-term lease agreement by which the property is leased back to the seller/occupier.  The long term lease agreement is referred to as triple net lease.  Under a triple net lease, the seller/occupier agrees to pay all expenses associated with the property use and occupancy, including the cost of: insurance, real estate taxes, improvements, on-site property management and maintenance, in exchange for control of the property and a favorable long-term lease.

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Sale-leaseback financing is when a company sells one or more of their single tenant owner occupied properties to a third party investor, usually for fair market value. The investor provides the seller with a triple-net operating lease for a period of 10 to 25 years plus options so that the seller can continue to occupy the property. Initially, the seller/tenant usually pays the investor a negotiated annual rent equal to 7% to 12% of the contracted sale price. Most often, the rate is credit-driven and the real estate is considered to be additional collateral.