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    SALE LEASEBACK VS. CASH OUT REFINANCE

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    SALE LEASEBACK VS. CASH OUT REFINANCE

    What are Sale-Leasebacks and Cash-Out Refinances?

    Sale-Leaseback: A sale-leaseback is a financial transaction in which an owner sells their property and simultaneously leases it back from the buyer. This allows the owner to access the capital tied up in the property while retaining the use of the property.
    Cash-Out Refinance: A cash-out refinance is a refinancing option where a new mortgage is taken out on a property for more than the existing loan amount, and the difference is provided to the property owner in cash. This method allows the owner to tap into the property’s equity without selling it.

    Benefits of Sale-Leasebacks

    1. Capital Infusion Without Additional Debt: Sale-leaseback allows you to unlock all the value in your building without taking on debt. By selling the property and leasing it back, you’re essentially monetizing the property’s value without increasing leverage on your balance sheet.
    2. Improved Cash Flow: Through a sale-leaseback, you can improve your cash flow by converting an illiquid asset (the property) into liquid capital. This liquidity can be used for various purposes such as expansion, debt reduction, or other investment opportunities.
    3. Elimination of Property Management: Sale-leaseback transactions often involve the seller becoming a tenant. This arrangement can eliminate the responsibilities of property ownership, including maintenance, repairs, and management, thereby freeing up time and resources.
    4. Flexible Terms: Sale-leaseback agreements can offer flexibility in lease terms, allowing the seller (now tenant) to negotiate favorable terms such as lease duration, rent escalations, and renewal options. This flexibility can provide stability and predictability for the tenant’s operations.
    5. Tax Benefits: Depending on the jurisdiction and the specifics of the transaction, sale-leaseback arrangements may offer certain tax advantages. For instance, the lease payments made by the tenant (previously the property owner) may be deductible as operating expenses, potentially reducing taxable income.
    6. Optimal Use of Capital: Sale-leaseback transactions can enable businesses to redeploy capital into core operations or high-return projects instead of tying it up in real estate assets. Businesses can now reinvest that capital into growth initiatives, such as expansion into new markets, research and development, or acquisitions.
    7. Mitigation of Market Risks: By selling the property and leasing it back, the seller mitigates exposure to fluctuations in property values and market conditions. Instead, they become primarily concerned with the terms of the lease, which can be structured to provide stability regardless of market dynamics.

    Factors to Consider When Choosing Between Sale-Leaseback and Cash-Out Refinance

    It’s important to note that the suitability of a sale-leaseback versus a cash-out refinance depends on various factors including current market conditions, the financial health and objectives of the business, the specific terms of the transaction, and tax considerations. Consulting with financial advisors and a Latitude Commercial Professional can help in making an informed decision based on individual circumstances.

    FAQs

    A sale-leaseback works by the property owner selling the asset to an investor and then leasing it back immediately. This allows the owner to free up the capital invested in the property while continuing to use it under a lease agreement.
    A sale-leaseback can be a good idea for businesses needing liquidity without incurring additional debt. It also helps in avoiding the responsibilities of property management. However, it depends on the specific needs and circumstances of the business.
    One potential problem with a sale-leaseback is the long-term cost of leasing the property back, which might exceed the benefits of the initial capital infusion. Additionally, the business loses ownership of the property, which could impact future financing options.
    The main risk of a sale-leaseback is that the business becomes a tenant and must adhere to lease terms. If the business faces financial difficulties, maintaining lease payments could become challenging. Also, changes in the real estate market could affect future leasing costs.

    Latitude Commercial provides commercial real estate services such as purchasing, leasing, landlord representationtenant representation, and commercial property management throughout the states of Illinois and Indiana. To find out how we can help you, call us today at (219) 864-0200.

    Click here to see commercial properties available for lease and for sale near you!

     

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