Sale-leaseback one option to raise cash for a business

Tim Whitney

Are you experiencing a temporary slump in cash flow because your business closed or was significantly affected by the coronavirus pandemic?

If you own the real estate in which you operate your business, then a sale-leaseback could offer a cash infusion.

There’s still lots of private money out there searching for good commercial real estate investments.  With government bonds and bank savings rates at ridiculously low-interest levels, investors who want better returns are willing to take on more risk.

Under a sale-leaseback, the owner of a building in which he or she runs a business sells the property and agrees to lease back the building — usually for a minimum of 10 years.

Sale-leaseback deals have been around a long time and offer advantages to seller/tenants and buyer/landlords.

For the seller/tenant, it’s a quick path to cash that can be put back into the business without giving up the use of the building. In addition, the seller/tenant extracts almost all the equity from the building rather than 75 percent or less with a conventional loan. That’s not to mention the fees and other costs associated with debt financing. What’s more, the balance sheet of the business looks better since it no longer shows the debt on the building. And if it’s an operating lease — meaning it meets Financial Accounting Standards Board rules — the balance sheet generally just shows the current year lease obligations.

The buyer/landlord benefits from a good return on a relatively safe long-term investment and enjoys tax savings in the form of depreciation.

While these types of transactions might appear relatively easy, there’s the potential for problems to arise in dealing with both purchase contracts and triple net lease agreements. Check with your accountant and lawyer prior to initiating a sale-leaseback transaction to make sure it’s a viable solution for your particular situation.