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  • Anthony Diaz, NAI Summit

The sale-leaseback approach


So you need cash but selling your business is not an option but the market is at an all-time high for real estate prices. A possible solution is a sale-leaseback. The owner sells the real estate that the company owns to an investor and then leases the space back on an agreed upon price and time period. The lease would be common to most leases. They can be fixed or have a gradual yearly increases and most are triple-net-lease arrangements. For the seller it gives the business capital it might need. Also for their clients it is a seamless transaction with no impact on them. Another great advantage of the sale -lease back for the seller is structuring the lease according to their needs, however if it is short term this could sometimes be a deal breaker for the investor buying the property. Also the seller usually receives more cash than traditional refinancing. Why? Because when using a conventional bank, banks will not lend 100% of the value of the property. Typically they will only go 70-80% Loan to Value, meaning 70-80 percent of what the property is worth. When you sell a business you receive 100% of the value minus capital gains. Capital gains could be an issue if you sell the property at a large gain or at a huge loss. For example, if you bought the property at $100,000 and had the good fortune at selling it at $500,000. That is a gain of $400,000, times that by the capital gains rate as high as 20%. A large loss could work against you as well. So this must be taken into consideration. Also the seller avoids costs associated with conventional financing such as points, appraisal, misc fees, etc. For the balance sheet the seller is taking a fixed asset and turning it into a to a current asset. (cash) Thus this can help if you want to borrow short term loans from a bank. Also for larger companies, if their is a bond agreement or debt restriction agreement, rent sometimes is not considered ineptness. The sales-leaseback can also help with much needed cash during a corporate takeover. And sometimes the cash could give the corporation a much better return on their capital compared to real estate appreciation. Another good thing about rent is that it typically is deductible for tax purposes. There are other advantages to the sale -lease back in regards to capital gains and losses under 1231 of the IRS code that should be consulted with a qualified accountant, especially for long term lease backs such as 30 years. As with anything in life nothing is perfect. There are disadvantages such as a loss of appreciation of the building. Unless you have a crystal ball no one can predict what real estate will do. If there is a major appreciation, the company will of course miss out on the gains. Remember you are not the boss,so that addition you just thought of might not fly with the new owner. Also the seller is obligated to the lease. The possible change of ownership could have you dealing with a new owner who might not be as accommodating as the past. These are all things to consider. Ok so what is the win for the buyer? You typically have a fully leased building with a solid tenant. Also you can typically see how the tenant took care of the real estate. Obviously appreciation in the property value is a benefit as well. Increasing rent payments is typical over a long period of time. There are ways of doing advanced depreciation on the property instead of the traditional term of yearly depreciation. Also the interest on your mortgage payment can be deductible and perhaps claim some tax credits that ownership could be eligible for. And do not forget the upkeep of the property and property management. Also it is the duty of the buyer to make sure the tenant pays the taxes on time and make sure to review the insurance. Lastly rental payments are considered ordinary income and not sometimes as favorable as capital gains. If you weigh the pros and cons, and be conscious of the idea, the sales-leaseback could be a solution clients are looking for. Anthony Diaz is assistant vice president at NAI Summit. n

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