Are you looking for a plan to increase your business’s cash flow? If you own business property, you may be able to benefit by entering into a sale-leaseback transaction. But while there several great benefits to this type of agreement, there are also some significant drawbacks. So, before you draw up the paperwork, schedule a time to meet with your financial advisor to find out if the benefit outweighs the risk.
Advantages Of A Sale-Leaseback Transaction
A sale-leaseback transaction occurs when you, the real estate owner and occupier, sell your property to a third party on the condition that they agree to lease the property to you. Entering into this type of arrangement has several benefits, including increasing your business’ cash flow while freeing your business up to allocate the capital to other areas of your business. Additional benefits include:
- As the seller and eventual lessor, you essentially maintain control of the property, which prevents operational disruptions from occurring.
- Assuming the current property is financed with debt, this long-term debt can be eliminated from the balance sheet under certain lease arrangements.
- From a tax perspective, you gain an additional annual “write-off” for the portion of rent related to the land (as land is not depreciated).
Drawbacks Of A Sale-Leaseback Transaction
Perhaps the most significant disadvantage of entering into this type of agreement is that you stand to lose the flexibility that comes with owning the property outright since these transactions usually are for longer terms than a typical property lease (15 or more years). The typical sale-leaseback transaction takes the form of a “triple net lease,” which usually states that you, as the tenant, will be responsible for the net real estate taxes, net building insurance and net common area maintenance. Other disadvantages include:
- The loss of the real estate’s appreciation value over the course of a lengthy lease term.
- Significant income tax impact that comes in to play when a property’s sale price significantly exceeds the property’s “book value.” This typically occurs when you are selling a property that has been owned for a long period of time prior to the sale.
- A decrease in your Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as your depreciation expense on the property is replaced by the rent expense.
The financial benefits of sale-leasebacks must be balanced with your unique strategic and operating considerations. A financial advisor and business consultant can help identify whether this option is right for you and your business. Email Rea & Associates to learn more about sale-leaseback transactions and other strategic business decisions.
By Ben Antonelli, CPA (Dublin office)