A sale/leaseback is a financing technique that provides an opportunity to raise cash for your business. A sale/leaseback takes place when a business sells real estate it already owns to a third party for fair market value (the “sale”), and then immediately enters into a long-term net lease and continues to occupy the property (the “leaseback”).
This allows you to unlock the value in your real estate, increasing your on-hand cash, which can be used to grow your business. You are paid fair market value for your property, which will provide cash to expand operations, pay down existing debt, create liquidity and/or substantially improve your balance sheet.
A sale/leaseback essentially provides 100 percent financing to the business owner. A company looking to build a new facility does not have to tie up cash in the form of the typical down payment of 25 percent or more, which is required by conventional banks.
Furthermore, the entire lease payment is tax deductible as compared with a traditional mortgage, where only the interest portion of the loan payment is deductible. If a company already owns its real estate, it can unlock the equity in the building and turn that equity into cash.
The original purchase price of a building, its cost and net of accumulated depreciation is shown on the balance sheet. A property that was purchased for $3 million 10 years ago is shown at a net book value of $2.25 million on the balance sheet but may have a current market value of $7 million.
A sale/leaseback on that property would replace the $2.25 million asset on the balance sheet with an asset of $7 million in cash.
An experienced real estate investment firm will not only handle typical sale/leaseback transactions but will also structure transactions in a customized manner to meet the particular needs of its clients.
An important consideration in any sale/leaseback transaction is structuring the lease as an operating lease as opposed to a capital lease. If properly structured, the lease can eliminate short- or long-term debt related to the real estate and eliminate the real estate asset from the balance sheet.
Thus, certain financial ratios, such as the debt-to-equity ratio, current ratio and return-on-assets ratio are measurably improved.
Century Equities Inc. has used this program with both public and private companies with equal success. In one example, 36 locations were acquired over a four-year period keeping the balance sheets “clean” for a private company hoping to be acquired.
In another example, a 300,000 square foot distribution center was built for a public company, which needed the facility but did not want to make a large capital investment.
A third example involved buying a single location from a small private company that wanted cash to use in various areas of its budget.
More companies are using sale/leasebacks as a cost-effective and efficient alternative to traditional debt in funding the costs of expansion, acquisition and construction of new facilities.
Don’t sit on the sidelines and let your competitors take advantage of this program — get in the game.
Chad C. Adams is director of project development for Century Equities Inc. and is based in Wheeling, W.Va. He can be reached at (304) 232-5411 or via e-mail at cadams@centuryequities.com.
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