What is Sale Leaseback in Commercial Real Estate?
In commercial real estate, a sale leaseback is a transaction in which one party sells a property and then leases that property back from the new owner. Sale leasebacks usually involve a pre-arranged contract, which often lasts 20 to 30 years. Sale leasebacks are especially helpful for business owners who are holding onto expensive retail or office property, but have cash flow problems or need equity to expand their business.
In most cases, sale leasebacks are triple net (NNN) leases. Often, they also include options for a tenant to renew their lease. In some cases, sale leaseback agreements give the tenant an option to repurchase the property after a certain period of time.
Sale Leaseback Benefits for Sellers
Sale leasebacks can be incredibly helpful for businesses who want or need to stay in their current location, but need a new source of cash in order to stay afloat. Unlike a mortgage, in which only interest is deductible, sellers can typically deduct the full cost of rent from their taxes. However, this may not be the case if the seller reserves an option to repurchase the property later.
Sale Leaseback Benefits for Buyers
Investors also sale leasebacks, since they immediately have a paying tenant for their property who is likely to be well-funded due to the recent property sale. Plus, since sale leasebacks are typically long-term leases, a buyer/investor can estimate their income for years to come.
Sale leasebacks are commonly combined with credit tenant leases (CTLs). With CTLs, a large brand with a nationally recognized credit rating takes out a long-term lease on a commercial property as a condition of the property purchase. CTLs typically have more favorable terms for borrowers, including much more lenient loan to value (LTV) and DSCR requirements.