When you can’t afford to continue making payments toward a property you own but don’t want to have to move out, you might take advantage of a sale-leaseback.
But what exactly is a sale-leaseback, what are its benefits, and how can you use it for your company or residence?
Read on to learn all you need to know about sale-leasebacks.
A sale involves selling your real estate or some other asset to a prospective buyer, and a leaseback means leasing the same asset right back from the buyer. Business owners and residential property owners alike can pursue this kind of real estate transaction.
A typical sale-leaseback is a financial arrangement where a company or person sells a real estate asset, then leases it back from the purchaser.
Here are two examples of sale-leasebacks in action:
The buyer purchases the home's mortgage, then accepts lease payments from the resident as a lessee. The rental rate will largely depend on the purchase price and the property's market value.
These are essentially rent payments, which the new owner receives as a rental income stream. The company that sold the property would become a lessee and be able to continue business operations as usual.
In effect, a sale-leaseback transfers ownership of the real estate asset to another owner, and the original owner gets to stay in the property and continue using it as they originally intended. It’s not a financing option like typical loans, as there is no guarantee that you will repurchase the property at the end of the lease.
However, you can be paid handsomely for your equity and will have the opportunity to stay on the property until you can make separate living arrangements.
Business owners and homeowners alike may benefit from lower monthly payments and interest rates with a new lease agreement. Meanwhile, the new owners of the real estate investment will open up a new income stream. As such, a sale-leaseback agreement can be beneficial for all involved parties.
In the future, the original seller can potentially even repurchase the property from the buyer/lessor if it is agreed upon in the terms of the arrangement. In this way, a sale-leaseback arrangement could be a short-term solution if you are behind on your rental payments. Returning the property could be especially beneficial if it’s undergone depreciation and you can buy it for less than you sold.
Sale-leasebacks offer several significant benefits that make them attractive alternatives to selling property for residential homeowners and companies. Let’s take a closer look.
For starters, a sale-leaseback gives you fast access to capital. This benefit is most helpful for companies with a commercial lease damaging the company’s balance sheet.
If a company sells the property it operates out of but remains as a lessee, it will start making regular monthly payments toward the new lessor.
However, the company can take most of its profit from the deal and invest it back into its core business, purchasing equipment, hiring more employees, and buying fixed assets. Immediate access to this capital can be highly advantageous for companies that need to expand or pay off other business debts.
Companies may benefit from a sale-leaseback because it often results in a better balance sheet. As the seller, the company gets to replace a fixed real estate asset with cash proceeds. That working capital takes the mortgage off the balance sheet, reducing corporate debt and putting more cash into the company coffers.
That’s a great thing, particularly if an investor meeting is coming up or a company needs to accumulate capital for a significant expansion in the future. Of course, the company also gives up ownership in the real estate, but that may not be such a bad thing if cash flow is stable and the company can expect to make lease payments consistently over the foreseeable future.
On top of the above benefits, companies often take advantage of sale-leasebacks because they can continue their operations without disruption. They don't have to move or change retail locations since they transition immediately from a real estate owner to a real estate lessee.
By opting for a leaseback agreement, they can keep servicing the same customers, maintain the same staff, and keep all their equipment in the same place. All while also freeing up a substantial amount of working capital to use as needed.
In contrast, selling a property and leaving it means the company would need to find a new retail space to continue its operations, incurring additional costs that could quickly eliminate the capital gains of the sale.
In a sale-leaseback situation, the new buyer (typically a bank or credit union) can agree to long-term leases with favorable terms to the seller. Often, these terms can give the original tenant more control of the property.
A tenant or business can continue to pay most operating expenses or taxes, freeing up the lessor to spend their money elsewhere while collecting steady income from the occupant.
One last positive to using a sale-leaseback comes in the form of tax benefits. As a property seller, you might get many income tax advantages come tax time, freeing up even more cash or netting significant savings.
The reason is that sale-leaseback rental payments are tax-deductible. So if you stop making mortgage payments but start making lease payments, you can deduct those from your taxes and reduce the income you have to report on your annual tax filing.
Naturally, anything that can save you money on taxes can benefit residential homeowners and companies. Homeowners, for instance, can itemize their deductions instead of taking the standard deduction, potentially saving more money than they would with a traditional tax setup.
As you can see from the above benefits, there are many advantages to using a sale-leaseback if you don’t want to move from a property. However, if a sale-leaseback isn’t the right fit for your needs and you want to retain ownership of your property, you can also consider co-owning with Balance.
With Balance, your mortgage will be replaced by an equity investment from us — your mortgage will be paid off, and you’ll make monthly payments to us that cover your occupancy of the home and your share of insurance and taxes.
As a co-owner, Balance shares in the appreciation, costs, and depreciation of the property. By sharing in your home’s future appreciation, we make it easier to stabilize your finances with low monthly payments.
In the meantime, you can get the cash you need, save up money, improve your credit score, pay off other debts, remain in the home, retain ownership of the property, and complete needed repairs. Balance is designed to help improve your finances and credit so you can repurchase our share and go back to being the sole owner of the property.
Working with Balance is the ideal alternative to selling your home or risking foreclosure. It’s why many homeowners have trusted us in the past and many more to come.
Want to know more? Contact Balance today and learn how we can help you avoid foreclosure without leaving your home or entering into a leaseback agreement.
Sources:
Leaseback (or Sale-Leaseback): Definition, Benefits, and Examples | Investopedia
Lessor vs Lessee - What You Need to Know About How Leases Work | Corporate Finance Institute
Tax Deduction Definition: Standard or Itemized? | Investopedia
Sale-Leaseback Transactions: Pros and Cons - 2023 | MasterClass
