Sale and leaseback arrangements allow landowners to free up capital while remaining in the property and can be beneficial if a landowner wants to unlock capital but remain on site for operational reasons.
A sale and leaseback arrangement is a form of financial transaction through which a property is sold to a third party, to then be leased back to the seller. The seller is able to lease whole or part of the property back from the buyer. By entering into a sale and leaseback arrangement, the seller accrues wealth from the sale, whilst retaining the right to use the property through the lease.
However, once the sale has been made, the seller (now tenant) becomes subject to rental payments and responsibilities as determined by the landlord under the lease. In this sense, there are common and disparate advantages and disadvantages for both parties involved in sale and leasebacks. These will be expanded upon throughout this article.
For the seller/eventual lessee, the most notable benefit is the ability to quickly obtain financial gain through the sale of the property, whilst being able to still access and utilise the property premises pursuant to the terms of the agreement. This arrangement often operates as a strategic financial decision for sellers, especially for corporate sellers, as cash can be redirected to other obligations such as supply costs, payroll, tax payments, and general business development.
Furthermore, sale and leasebacks are a preferred alternative to mortgage financing, as the seller secures the entirety of the property’s value through the sale. Similarly, these transactions attract various tax deductions, again offering more financial incentives than mortgages.
For the purchaser/eventual lessor, there is a shorter turnaround time between purchasing and leasing the property, as the seller is automatically secured as the tenant. This eliminates the need to undergo lengthy and costly real estate processes.
In addition, the longer terms of sale and leasebacks can allow the landlord to better predict rental income into the future.
For the seller/eventual lessee, the most substantial loss incurred through sale and leaseback transactions is the potential for future capital growth. This is especially pertinent if market value increases, and the seller has already forgone legal ownership of the property and cannot profit from this change in economic environment.
The leases also typically extend to a long term of around 20-30 years. This limits the flexibility for the seller/eventual tenant, especially where the lease does not allow for the renegotiation of key terms.
For the purchaser/eventual lessor, there is a heightened risk of tenant default and vacancy in comparison to conventional leases, due to the long duration of sale and leaseback arrangements.
Overall, sale and leaseback agreements are favourable mechanisms for both the seller and purchaser of the property. Sale and leasebacks can be used as a way for landowners to access capital while continuing to remain at the property. For buyers, these arrangements are an opportunity to secure long term rental incomes. Provided parties are aware of the potential disadvantages, and how to mitigate these risks, sale and leasebacks offer mutual benefit for those involved.
For assistance with understanding further details on sale and leaseback arrangements, please contact our people:
Ron Zucker 0410 590 111
Chelsea Woodward 0404 065 899
Eollyn Cortes 0478 727 395
Anna Polhill 0431 174 352