Commercial Insights - Sale and leaseback transactions

Knight Frank's guide for Owner Occupiers
2 minutes to read
Categories: Covid-19

A sale and leaseback transaction is a way of releasing capital that has previously been tied up in your commercial real estate. The released capital can be injected directly back into your company for the benefit of the business.

Through a sale and leaseback, the owner of a property sells the asset to an investor who immediately leases the premises back to the vendor (the vendor, in turn, becomes the tenant).

Advantages of Sale & Leasebacks

  • Release capital for the wider benefit of your business – capital that has previously been tied up in the value of your real estate can be released and injected back into your operations, used for wider investment or simply held as working capital.
  • Unlock the full value of the asset – availability of commercial credit is currently at low levels and mortgagebacked financing typically only unlocks c.60% of the value of the underlying asset. A sale and leaseback enables a company to receive 100% of the value of its property (subject to transaction and tax costs).
  • Cash without debt – unlike a bank loan, the capital generated does not have to be paid back and would not create or increase any indebtedness. Under accounting principle IFRS 16, most companies are required to recognise leases as liabilities on their balance sheets.
  • Lease terms to suit you – the lease can be negotiated to suit the organisational needs of your business. The structure of the lease is inextricably linked to the realisable value of the asset.
  • Fixed, forecasted outgoings – under the lease, rental payments and other outgoings are clearly determined. This allows for clearer and more accurate business forecasts for the vendor.
  • Tax-efficient – a sale and leaseback transaction can create tax benefits as the rental costs are offset as an operating expense. This means that usually they can be deducted in full, unlike a conventional loan where only the interest payments are tax-deductible.

Unlocking the Full Asset Value

For more information contact Charles Hobart.