What is a Sale and Leaseback?
If you’ve heard the term “A Sale and Leaseback”, you may be wondering exactly what it means.
A Sale and Leaseback is an arrangement where an owner-occupier of a commercial property sells that property and stays on as a tenant, and leases it back for any length of time that suits both parties, with annual reviews to keep rent in line with market conditions.
The owner-occupier is planning to sell the business down the track with the intention of retaining the property as a source of retirement income. A prospective acquirer of the business would consider paying the full asking price knowing that continuing to run the business from the same location means the customers of the enterprise at the same location minimises loss of customers and cash flow.
The owner-occupier is planning to expand the business but has already reached the maximum line of credit with their bank. The Sale and Leaseback will deliver the required cash to the business expansion and possibly the reduction of the line of credit.
One of the main benefits when you buy a commercial property with a Sale and Leaseback arrangement is that you immediately have a tenant providing a rental return on your new property investment.
A cash-flow yielding investment from day one is the ultimate “solid” start-up for property investors.
This is compared to a landlord with vacant premises requiring time to filling their property, offering lease incentives – be it a rent-free period or cash contribution to the lessee’s fitout cost.
A good deal on a Sale and Leaseback will be one where the purchase price reflects that of a vacant property, as opposed to a purchase price loaded with a premium for being sold with a tenant (cash flow and no cost to finding a lessee).
Remember, a Sale and Leaseback opportunity should be a solid transaction now and into the immediate future. To this end, consider the following key (but not limited to) factors in the lease:
- Minimum lease period.
- Suitable return i.e. gross and net yields.
- Annual rental increase in line with market conditions.
- A bank guarantee, typically of 3-6 months from the lessee, to protect your asset.
It’s also important to perform due diligence in ascertaining if the business is successful and thriving, and adjust the terms if there is an element of risk that may be involved.
With the right conditions, a Sale and Leaseback can be an arrangement that is profitable and hassle-free for both parties.