What is a sale-leaseback?

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A sale-leaseback is typically a commercial real estate transaction in which one party, often a company, sells its real estate assets to another party (such as an institutional investor, a real estate investment trust [REIT], a family office or a high-net-worth individual) and then leases the property back on a long-term basis. The lease terms and rental rate are based on the new investor/landlord's financing costs, the lessee's credit, the property's location, the quality of the real estate and a rate of return (a "cap rate") that is acceptable to the investor/landlord.

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What are seller advantages of a sale-leaseback?

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The reasons and advantages for a seller/lessee are varied, but the most common are:

• Help finance expansion of the existing business, purchase new plant equipment, or invest in new business opportunities. A sale-leaseback enables a corporation to access more capital than traditional financing methods. When the real estate is sold to an outside investor, the corporation receives 100% of the value of the property. Traditional financing is limited to loan-to-value ratios of between 60% to 75% for most middle-market companies.
• Help pay down debt and improve the company's balance sheet.
• Help reduce the seller/lessee's business income tax liability, because entire rent payment is tax-deductible, as opposed to only the interest portion of a mortgage payment.
• Eliminates residual value risks associated with the long-term ownership of real estate.

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What are investor/landlord benefits of a sale-leaseback?

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The advantages for an investor/landlord are:

• Fair return on the investment in the form of rent during the lease term, and ownership of a depreciable asset already occupied by a reliable tenant.
• Long-term, fully leased asset with a guaranteed income stream.
• For income-tax purposes, the investor/landlord can take an expense deduction for an investment in a depreciable property to allow for the recovery of the cost of the investment.
• Ability to invest in real estate with a tenant who is already familiar with the property and who continues to be solely responsible for the property's maintenance and operation.

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Do I have any personal liability in a sale-leaseback transaction?

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Typically, our sale-leaseback transactions have had no personal liability, no financial covenants or restrictions and 10 to 20-year leases with term extensions and repurchase options. The company has complete operating control of the real estate and it does not give up any ownership interests in the operating company. Further, unlike debt service payments, the entire amount of the lease payment is deductible for tax purposes.

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