A sale-leaseback transaction allows owners of real property, like real estate, to free up the balance sheet capital they've invested in an asset without losing the ability to continue using it. The seller can then use that capital for other things while the purchaser owns an immediately cash-flowing asset.
What is a sale-leaseback transaction?
A sale-and-leaseback, also known as a sale-leaseback or simply a leaseback, is a financial transaction where an owner of an asset sells it and then leases it back from the new owner. In real estate, a leaseback allows the owner-occupant of a property to sell it to an investor-landlord while continuing to occupy the property. The seller then becomes a lessee of the property while the purchaser becomes the lessor.
How does a sale-leaseback transaction work?
A real estate leaseback transaction consists of two related agreements:
- The property's current owner-occupier agrees to sell the asset to an investor for a fixed price.
- The new owner agrees to lease the property back to the existing occupant under a long-term leaseback agreement, thereby becoming a landlord.
This transaction allows a seller to remain an occupant of a property while transferring ownership of an asset to an investor. The purchaser, meanwhile, is buying a property with a long-term tenant already in place, so that they can start generating cash flow immediately.
Why would you do a sale-leaseback?
A sale-leaseback transaction benefits both the seller and the purchaser of a property. Benefits to the seller/lessee include:
- The ability to free up balance sheet capital invested in a real estate asset to finance business expansion, reduce debt, or return cash to investors.
- The ability to continue occupying the property.
- A long-term lease agreement that locks in expenses.
- The ability to deduct rent payments as a business expense.
Likewise, the purchaser/lessor also experiences several benefits from a leaseback transaction, including:
- Ownership of a cash-flowing asset, backed by a long-term lease.
- Ownership of a property with a long-term lease to a tenant that needs it to support its operations.
- The ability to deduct depreciation expenses on the property on their income taxes.
Examples of sale-leaseback agreements
One of the most common types of sale-leaseback transactions is between commercial property owner-occupants and real estate investors like real estate investment trusts (REITs). In these transactions, the owner-occupant sells its property to the REIT, which leases it back to the seller. These deals allow the seller to free up the balance sheet capital they had tied up in real estate assets to reinvest in growing their business, repay debt, or return cash to investors. The REIT, meanwhile, adds another property to their portfolio of cash-flowing real estate assets, helping them to diversify while growing their income stream to support a higher dividend.
Another, though less common, sale-leaseback transaction involves residential homes. For example, if a home sells quicker than a seller anticipated, they can close the sale to the buyer and lease the house back until they close on their new home. Similarly, a homeowner can sell their house to a family member or an investor-landlord and lease it back so that they can remain in the home.
Sale-leaseback transactions can be a win-win for both the buyer and seller
A sale-leaseback transaction allows a property owner to cash in on the value of a real estate asset without having to give up access. Meanwhile, investors/landlords can purchase properties with immediate cash flow backed by a long-term lease with a tenant that wants to remain an occupant. That makes it a potentially beneficial transaction for both parties.