A commercial “sale-leaseback” transaction is a viable method for commercial property owners to raise capital for investment in other projects or ventures. In a commercial “sale-leaseback,” a seller and purchaser of commercial property enter into two, simultaneous agreements where: 1) the seller sells the commercial property to the purchaser and 2) the purchaser leases the commercial property back to the seller. The seller thereby becomes the tenant under the lease and the purchaser becomes the landlord.
Generally, a commercial “sale-leaseback” provides a seller-tenant with capital to pursue other investments while guaranteeing purchaser-landlord with a predictable return on investment over the duration of the lease. However, a commercial “sale-leaseback” also involves other advantages as well as several disadvantages.
Other advantages include:
1. Advantages
a. Seller-Tenant
i. Influx of capital.
ii. Deduction of rental amount as operating expense.
iii. Elimination of remaining debt encumbering property.
iv. Retain possession and financial control of property without tying up financial resources.
v. Leverage in negotiating lease terms.
b. Purchaser-Landlord
i. Specified return on investment with low risk.
ii. Contract out risk areas through a triple-net-lease.
iii. Protection from market volatility.
iv. Depreciation and investment tax credits.
Some disadvantages are:
2. Disadvantages
a. Seller-Tenant
i. No ownership interest in leased property at end of lease term.
ii. Risk of higher-than-market rental payments if real estate market declines in value.
b. Purchaser-Landlord
i. Viability of seller-tenant.
ii. Status of general creditor as opposed to secured creditor if seller-tenant defaults.
iii. Maintenance costs.
A commercial “sale-leaseback” is a creative way for commercial property owners to finance new investments. Depending on the circumstances of the commercial “sale-leaseback,” both the seller-tenant and purchaser-landlord must weigh the advantages and disadvantages of such a transaction.
Karpus Law combines legal experience with sound business practices to provide small and mid-size commercial clients with tailored solutions to their legal and business problems. For more information, please visit www.karpuslawfirm.com. To schedule a free consultation, please call (973) 645-9453.
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