Sale and Leaseback is the sale of an interest in a property and the subsequent leasing back of that same property. It is one of the best tools to use in generating capital from Real Estate. This form of financing starts as a sale and the seller then agrees to lease back the property being sold. Sometimes this leaseback can merely be a move to entice the buyer into the transaction. In its more effective use, the sale and leaseback is a technique that allows the seller to maintain the use of the property.
On the Corporate front, real estate sale and leaseback is when a business sells its commercial property for its fair market value and then immediately leases it back. It is also used by developers to build a corporate building, serviced apartment or hotel as "financed" by the purchasers, but most importantly, the Corporate retains control of the property.
Here are some of the resulting benefits of a Sale and Leaseback for a Corporation:
- Free-up capital for re-investment.
- Improve the balance sheet.
- Receive 100% of Open market value.
- Low payments with long terms (up to 25 yrs.).
This has become an increasingly popular means of generating capital for immediate use. A sale-leaseback vehicle unlocks the value in your real estate assets and provides you with immediate working capital.
How do you start?
- Firstly determine the Open Market Value of the property
- Then you will need to ensure the existing or potential cash flow/opportunity cost in the said property.
- Then you determine the Yield that you will be providing and the basis of the yield i.e. Nett, Double Nett or Triple Nett. Based on this yields and cashflows,
- You will then need to structure the "deal" i.e. Vendor"s Obligations, Purchaser"s Obligations and in some cases, a third party "Lessee"s Obligations".
- The next is of course to package the whole thing together and commence the marketing of the product.
For personal needs in this scheme, it is always advisable to be the Buyer i.e. the Landlord of the property and the subsequent leasing of the property to the seller or their nominees. What do you buy in a scheme like this? We advice to only participate in Sale and Leaseback schemes where the seller or their nominee uses and maintains the use of the property i.e. as a hotel or a serviced apartment or for other business usage. This kind of scheme would ensure that the seller is still involved and committed in the success of the Scheme for a long term.
Issues to look out for in a Sale and Leaseback scheme include:
- Term of Tenancy. The longer the better, but the norm is usually 3+3
- Date of Commencement of Tenancy, especially if you have bought an off the plan development. Ensure that the date is fixed
- Rental Amount. It will usually be a percentage of the Purchase Price or in some cases will also include a profit sharing ratio. Acceptable percentage levels include 6%-8% on both gross and nett levels and acceptable profit sharing levels will be 65% to the owner and 35% to the Seller/Nominee. It is important to ensure what the percentage level is and also the terms of the returns, i.e. whether it is Gross or Nett. Do look out for what are the costs that you will have to bear, including Quit Rent, Assessment, Service Charges etc and whether the payment to you is nett of all this amounts
- When the Rentals are Paid. For cashflow reasons, please check this clause carefully. Payment mode will differ from Quarterly, Half Yearly or even Yearly in advance
- Furnishing (if applicable). In most serviced apartments or hotel, furnishing is a requirement. Ensure if it is part of the purchase price or is separate and also ensure that the furnishing is the same for the whole development. This would make sure that there are no preference units.
- Sinking Fund. Look out for the establishment of the sinking fund for the Building. Very important especially is sale on Strata. In event the sale includes the Furniture, ensure the Seller/Operator also provides a sinking fund for your furniture.
There a lot of advantages in a Sale and Leaseback scheme, for both the Seller and the Buyer. However, the Sale and Leaseback is actually more complicated than it appears on surface. It requires good, sound structuring, packaging, marketing and possible legal and tax considerations. One should never enter into a sale and leaseback unless there is absolute confidence that the transaction is beneficial to both parties.
Previn is the Principal of Zerin Properties, a Professional Registered Real Estate Agency Company. For feedback and inquiries, please e-mail to firstname.lastname@example.org