A sale-leaseback is a replacement for financing in which a company sells a commercial property for cash in exchange for a long-term lease with the buyer. Sale-leasebacks enable companies to capitalize the market value of their facilities and re-deploy that capital into their core business.
The deal structure provides liquidity for companies whose core business is not real estate, but that own valuable property as part of their operating business. Industrial buildings are the most common product type, but office and retail are also frequently traded in sale lease-back transactions.
There are several benefits to employing sale-leaseback financing. Most notably, the firm is able to continue operations in property that it no longer owns while generating liquidity. Also, it is possible to transfer ownership to a holding company, while keeping proper track of the ongoing worth and profitability of the asset. Lastly, the seller/operating company can raise money by capitalizing a valuable asset to a buyer who is interested in making a long-term secured investment.
Ultimately, firms that utilize sale-leasebacks increase their return on assets (ROA), return on invested capital (ROIC), and borrowing capacity through a strengthened balance sheet. Leaseback arrangements are common in the Real Estate Investment Trust industry where the REIT’s real estate asset management expertise and low cost of capital make them a well qualified owner. Sale-leaseback is an innovative form of financing for many pursuits, including: debt reduction, acquisitions, exit financing, and the development of equipment to grow the business.