UNLOCKING EQUITY: 5 Benefits of a Sale Leaseback for Buyers and Sellers BY: CHUCK EVANS

Are you an owner-operator looking for an alternative to traditional financing? Whether you’re looking to buy or sell, a sale leaseback has advantages you should know about. WHAT IS A SALE LEASEBACK?

A sale leaseback is a transaction which allows an owner-operator to sell their real estate to a buyer then the property back from the buyer for a designated period. There are two parties to a commercial sale leaseback transaction who take on four different roles: the seller and buyer, who become, respectively, the operator and . BENEFITS FOR A BUYER:

BENEFITS FOR A BUYER:

1. BRAND NEW LEASE not pay out of pocket. When an operator As opposed to most properties on the market, a structures a sale leaseback with the intent of sale leaseback is a way of securing a new lease renovating current locations, it shows the buyer beginning the moment your transaction closes. a commitment to the location, but can also boost This eliminates the confusion of any credits back yearly sales revenue. to a buyer from a seller due to rental payments that were made when in escrow. It also allows for 4. ESTABLISH A PERSONAL preferable financing, which can lower a buyer’s RELATIONSHIP WITH YOUR monthly service and increase their overall OPERATOR cash flow. With a big corporation, it might be hard to communicate with your operator about the 2. CUSTOMIZABLE LEASE TERMS property. After going through lawyers and If you have ever looked at a property and said receptionists you might be able to leave a to yourself “If only the rent was ‘X’ instead of message on a general company voicemail. ‘Y’ or “I would buy if it had two percent annual However, in purchasing a sale leaseback you increases instead of 10 percent increases every will undertake a process of customizing a lease, 5 years” then a sale leaseback is the therefore you will have direct contact with your for you. The process allows a complete hands- operator for any issues that might arise. on customization of the lease, which can give the buyer a sense of security knowing they are 5. ACCESS TO AN IN-DEPTH LOOK AT purchasing exactly what they want. THE CURRENT OPERATOR One of the biggest mistakes buyers make when 3. INVESTING IN AN EXPANDING purchasing a property is not looking at the ENTERPRISE historical performance of the operator. When Most, if not all, operators structure sale purchasing a sale leaseback, the Buyer will leasebacks as a financing tool. They look for have a complete view into operator sales and financing that will expand their enterprise and consolidated company financials to make the increase their overall return from being a 10-unit best decision possible. Through this information operator to a 20-unit operator. Renovations are a buyer can project future sales and success, another cost that operators would rather which drastically reduces the risk of vacancy. BENEFITS FOR A SELLER:

1. REAP THE MONETARY BENEFITS or renovating your current sites. With a sale An operator’s main business model is running a leaseback, you will be able to receive the most business, whether it is food, gas or anything else, for your property because the market will always not necessarily owning real estate. Through a pay fair market value. sale leaseback, an operator can turn the illiquid on their to liquid capital and 4. TAX CONSIDERATIONS reinvest in their core operations. This allows the In structuring a lease with a new landlord, seller to choose when to obtain an increase in a franchisee has the ability to deduct any equity in the property while continuing to operate payments made to the new owner as a business the property. . In these payments, an operator can shield money which might otherwise be lost in 2. CUSTOMIZE LEASE TO THE taxes paid to the government. This gives you the OPERATOR - PREFERRED TERMS ability to dramatically reduce your tax basis and Although there will be a new landlord after the increase your bottom line. transaction, the seller will be able to customize the lease. Operators are able to set lease terms 5. MAXIMIZE YOUR RETURNS such as rent, rental increases, options at the Through a sale leaseback, a seller can pocket end of the base term and length of the lease. vast amounts of cash. This money is best Having a healthy rent to sales ratio is essential utilized when put back into the properties’ core to operators and being able to completely operations. If an operator has the ability to customize your lease gives you the freedom to quickly add more locations to their portfolio, they safely and effectively profit on unused capital. will be able to increase their yearly cash flow in a very short amount of time. Also, investing the 3. EXTRACT 100% OF THE FAIR MARKET money into renovating any current locations is a VALUE (FMV) OF THE PROPERTY great way to jump company wide sales 10 to 15 In most traditional financing scenarios, a percent will only let you borrow 60 to 70 percent of the equity that your property holds. Right there is an extra 30 to 40 percent of unexploited wealth that could be going towards building more locations IS A SALE LEASEBACK RIGHT FOR MY BUSINESS?

While there are many benefits to a sale leaseback it’s always best to seek out expert advice. To see if this financing option is right for you, contact a Matthews™ specialist.

CHUCK EVANS

P 310.919.5841 E [email protected]