Sale-Leasebacks, in real estate, are financial transactions whereby an owner of real estate sells its property and then leases it back for a long term. These transactions have been popular for decades and are a consistent form of financing for businesses. The question is: Is a Sale-Leaseback right for you?
Sale-Leasebacks are not the right solution for everybody, but if raising capital to expand the business is important, this form of financing should be considered. If the Cap Rate you can sell your property for is less than the rate your bank will lend you money, or finance your property, it is another reason to consider a Sale-Leaseback.
There is no doubt that the Fed has been incredibly accommodative with its fiscal policy. The result has led to widespread Cap Rate compression and higher real estate values in all classes of real estate that involve rental contracts. So when does the policy end, or does it? That is the million dollar question. If, or when, the Fed starts to raise interest rates property values will likely be affected negatively. As bond and mortgage rates go up, Cap Rates will follow, and properties may have lower values to investors.
So, if you, or your company, owns its real estate this may be a great time to sell, and leaseback your property. Rents are starting to move up and values are still very high. Is this the opportunity to lock in a low rental rate and take some chips off the table?
There are a few reasons not to do sale leasebacks. One reason, if you live in California or another state with tax protection, is Tax Basis. If for instance you inherited the real estate and enjoy an extremely low tax basis due to proposition 13, any gain in cash may be offset by higher real estate taxes in the future. Another reason may be that your business does not necessarily need the real estate you are considering to sell. In that case it may be more beneficial to sell to another owner user. Yet another reason is the potential for change in accounting methodologies. FASB and IASB have proposed, and are working to change how leases are accounted for, and the most likely outcome is that leases will be capitalized. This change will affect companies financial statements and should be considered. Lastly, if your property is in a very special location that will continue to appreciate at rates higher than the average property, it may make more sense to hold on to it for the next generation.