Whether you are a real estate investor, or a property owner, sale and leaseback can provide you with multiple benefits in the long term. And while there are advantages to this type of financial transaction, there are some considerable drawbacks.
For those of you who don’t know, sale and leaseback involves selling a property and then leasing it back to you from the new owner. This way, you will be able to use that asset, but you won’t own it. Keeping this in mind, there come both advantages and disadvantages to sale and lease.
Read on as we describe some of the top ones in this blog.
Advantages of Sale and Lease
Improved Financial Flexibility
Now that you know what is leaseback, it’s time to see how it actually affects your financial flexibility. Sale and leaseback results in extra capital generation. This capital then provides you with enhanced financial flexibility. As a seller, you can easily control the structure and terms of the deal.
Moreover, you also get a significant amount of capital that allows you to expand further in the future. It also allows the business to respond quickly to changing market conditions, adapt to unexpected expenses, and seize growth opportunities as they arise.
Safety from Property Value Fluctuations
Investors who know real estate also know that property values are not always constant. They can fluctuate a lot and are volatile most of the time. This happens because of factors like economic conditions, local market dynamics, and changes in property demand.
By selling the property and leasing it back, you can easily mitigate the risk of property value fluctuations and transfer that risk to the new owner. This allows the business to focus on its core operations without being affected by the ups and downs of the real estate market.
This way, you can be stable and can easily predict what’s going to come your way. This will allow you to plan your business accordingly and allocate resources more thoughtfully.
There are certain taxes applied on the properties every year. If you have sold and leased back your property, you won’t be entitled to any of these taxes.
Lease payments made by the company may be tax-deductible as operating expenses, reducing taxable income. These tax advantages can lead to increased after-tax profits and improved cash flow, further enhancing the financial benefits of the transaction.
Customized Lease Terms
This is where the main difference is found between the normal selling of property and the sale and lease back. In sale and leaseback, you can customize the terms of lease to suit your needs. You can consider the factors like lease duration, rental escalations, options for renewal, and specific maintenance or improvement responsibilities.
Customizing the lease terms ensures that the arrangement aligns with the company’s long-term objectives and operational requirements. It provides the flexibility to adapt to changing business conditions and ensures that the leaseback arrangement is the right fit for the company.
Disadvantages of Sale and Leaseback:
It is true that sale and leaseback will provide you with immediate money, but if you see the long-term benefits, there are none. Rather, you will face more costs for that property in the long term. This is because, during the duration of the lease, you will be making regular rental payments to the new owner of the property.
These rental payments can add up quickly over time and will cause you somewhat more costs in the long term. Moreover, it is often seen that the property value appreciates over time, so it will cost you more to pay rent for the property you once owned and is now way costlier than it was back when you sold it.
Loss of Property Appreciation Potential
This is the same thing we mentioned in the above paragraph. If you see historically, the property value has always appreciated over a definite period. So, when you are giving your property on sale and leaseback, you are actually losing on the property appreciation potential that could have benefited you otherwise.
Additionally, if the property experiences significant value growth after the sale, the business may find itself in a situation where it needs to negotiate higher rent payments upon lease renewal. This can result in increased costs for the company over time.
Reduced Control Over Property Use
When a business sells a property and leases it back, it loses or reduces control over the property’s use and management. The new owner, now the landlord, has the authority to set rules and regulations regarding the property. This can include restrictions on certain alterations, renovations, or changes in how the property is used.
Furthermore, if the new owner decides to sell the property in the future, you will have to make changes in the ownership of the property which can lead to some uncertainties in the property availability for lease.