What are the benefits of selling and leasing back Commercial premises?
Mon 08 Jan 2024
Sale and leaseback is where the owner/occupier of a business premises can release capital by agreeing to sell the property to a third-party investor, subject to them entering into a lease of the premises.
Simply, the original owner/occupier becomes the tenant and the new investor/owner becomes the landlord.
Releasing capital through the sale of a property asset can be a good way to inject cash into a business, and can be used to fund growth, invest in new machinery or technology, or to pay down debt.
Furthermore, 100% of the property value can be released, a much fuller amount than raising cash through conventional mortgage funding which may only offer 50-60% of this.
Also, interest rates mean borrowing is currently expensive.
Sale and leaseback also means the business owner gets to stay in their premises, which saves time, money and disruption involved in moving.
There is flexibility too; the terms of the lease can be whatever the parties want them to be, but typically a long unbroken lease (minimum five years; 10 years ideally) to a trusted covenant on full repairing and insuring terms will attract most interest from potential investors, and will generate the greatest sale proceeds.
Getting the rent right will be important. Too low and it will be ‘under rented’ and the seller may not achieve best value, and if the rent is too high it will be deemed ‘over rented’ which can depress value, as there will be little prospect of future rental growth.
If an owner/occupier can get to grips with transitioning from being a property owner to a property tenant, then sale and leaseback could be an attractive way to generate cash.
Upon completion of the transaction, the occupier will need to understand that they will not benefit from any subsequent increase in value of the property asset – that will be the reward of the new owner.
It will be important for investors to be entirely comfortable with the financial standing of the occupying company, and full scrutiny of accounts and business plans is advisable.
For more information you can contact Nick Dunn in Norwich on 01603 629871.
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