What is a sale-leaseback?
In the typical sale-leaseback, a property owner sells real estate used in its business to an unrelated private investor. Simultaneously with the sale, the property is leased back to the seller for a mutually agreed-upon time period, and at a rate acceptable to the investor; a typical lease rate today might be equal to a 7 percent to 7.5 percent return on investment.
What are the benefits to the Seller?
With a sale-leaseback, the seller reclaims use of the capital that otherwise would be tied up in property ownership, and at the same time retains possession and continued use of the property for the lease term.
The seller usually receives more cash with a sale-leaseback than through conventional mortgage financing; in a typical transaction with both land and improvements, the seller receives 100 percent of the property’s market value (minus any capital gains tax). In comparison, conventional mortgage financing normally funds no more than 70 percent to 80 percent of a property’s value.
The seller usually can structure the initial lease term for a period that meets its needs without the burden of balloon payments, call provisions, refinancing, or the other issues of conventional financing. Moreover, the seller avoids the substantial costs of conventional financing such as points, appraisal fees, and some legal fees.
The main tax advantage of a valid sale-leaseback is that rental payments under the lease are fully deductible. With conventional mortgage financing, a borrower deducts interest and depreciation only.
Why Do Prospective Tenants Get Lease Quotes in Dollars or Cents?
Commercial real estate people can sometimes really confuse tenants when we are giving lease quotes. Usually it is unintentional and it typically happens when tenants and real estate people are discussing office space and industrial space.
Office space lease quotes are generally discussed in annual terms. For example, a client is looking at a 5,000 square foot space and is quoted a lease rate of $10.80 per square foot. The client then walks across the street into an industrial park and the real estate professional quotes him an industrial lease rate of $0.90 per square foot for his / her 5,000 square feet. Now these two quotes don’t sound the same but in fact are the same amount but one is quoting annual rent and one is quoting monthly rent. To convert one to another, simply divide the annual rate by twelve or multiply the monthly rate by twelve to compare apples to apples. It certainly can be confusing to the new tenant out there in the market place but any real estate professional can quickly make the conversions and explain the process so that tenants can make accurate comparisons easily.