Sale and Leaseback to raise Capital
Category Newsletter: Ceo's Message
Sale and Leaseback to raise Capital
A sale-and-leaseback is typically a commercial real estate transaction in which one party, often a corporation, sells its corporate real estate assets to another party, such as an institutional investor, a real estate investment trust (REIT) or private investor and then leases the property back at a rental rate and lease term that is acceptable to the new investor/landlord. The lease term and rental rate are based on the new investor/landlord's financing costs, the lessee's credit rating, and a market rate of return, based on the initial cash investment by the new investor/landlord.
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 Company 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 as opposed to traditional financing which is limited to a loan-to-value ratio typically around 60 to 70%.
- Help pay down debt and improve the company's balance sheet.
- the seller/lessee as a tenant can deduct all rent payments as a legitimate business expense on its annual tax returns.
- Helps limit risks associated with owning real estate such as cyclical market variations.
The advantages for an investor/landlord are:
- Fair return on the investment in the form of rent during the lease term, and ownership of an 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.
Marder properties has a database of investors which could be a match for your property and needs. To discuss Contact Graham Marder +27 11 4531220, +27 826522236 graham@marder.co.za.
Author: Graham Marder
