Sale-Leasebacks Are Making a Comeback

With the end of the financial crisis nowhere in sight, businesses are having a difficult time securing bank financing. As a result, the sale-leaseback financing method is quickly becoming one of the more secure ways to raise capital.

A sale-leaseback occurs when a company sells the property, then leases it back for a specified period of time, usually 10 to 25 years. The seller retains control of the property, while being able to use the income from the sale. Most sale-leasebacks are structured as “triple-net,” meaning that the seller remains responsible for all operating expenses, insurance, taxes and maintenance of the property.

Retail businesses have historically used sale-leasebacks because they get a higher return on their inventory than they do on real estate. For example, if a retailer’s return on inventory is 15 percent, that return is far higher than the cost to lease their building at the standard, which may be in the neighborhood of seven percent of the value of the building.

Even if financing is available, sale-leasebacks can be preferable because they do not increase debt and can have a dramatic positive affect on a company’s balance sheet. Sale-leasebacks can also improve a company’s overall financial position by increasing equity or reducing debt.