How Sale and Leaseback Transactions Can Assist Owner Occupiers of Commercial Property Unlock Cash

 

Amidst the uncertainty of the economic times that we find ourselves in today due to the direct impact of the global pandemic, organisations are reshaping their core business models and reevaluating their use of assets. Fast-tracking liquidity is, even more, pressing now as Owner Occupiers focus on finding ways to unlock and free up their cash flow.

Our Investment specialists Andre Theron and Wessel Muller unpack a Sale and Leaseback transaction and explain how this approach can unlock capital tied up in fixed property.

 A Sale-Leaseback Explained

  • Business owners who operate their business from property they own, choose to sell the property and then lease that same property back from the buyer that has purchased the property.
  • The seller of the property will then lease this property back from the buyer by signing an agreement called a Leaseback (also known as a Sale-Leaseback) more commonly referred to as a “Sale and Leaseback”.
  • Once this transaction has taken place the seller of the property becomes the lessee and the buyer becomes the lessor.
  • The seller (the first owner) will lease the property back on a long-term basis – in this way, the business owner can continue to use this vital asset but cease to own it.

A sale and leaseback enables an entity to sell its non-core assets to raise capital without disrupting the business in any way. Whilst the property is vital to the business that operates from the premises, the property itself is not its core business activity. Property ownership is therefore not seen as essential to the success of running the business. In fact, property ownership can present its own challenges. Disposing of non-core property assets can alleviate debt and the unlocked equity can be re-invested into core activities to assist the business with growth and sustainability.

Our database of seasoned property investors interpret property as their core business and the Sale and Leaseback is seen as a win-win transaction. Both parties benefit in that property investors are continually seeking property investments with strong underlying tenants which give them a trouble-free investment return. The business owner disposes of the responsibility/distraction of property ownership with associated mortgage loans and unlocks the equity needed for the business to thrive. The business owner is then in a stronger position to negotiate better terms with its bankers and creditors as it would now have less bank exposure and will be in a stronger position from a cash flow point of view.

There is a seamless transition as the business continues its normal operations now boosted by a cash injection while ownership of the property is transferred in exchange for a Leaseback Agreement.

Why is a leaseback beneficial?

In many cases, the property is not the core activity of the business and therefore companies will consider selling non-core assets such as property to raise capital to fund and/or grow the core business. In a challenging economy such as what we are currently experiencing with the COVID-19 pandemic, this approach can be a lifeline to many businesses.

Potential Benefits to Seller/Lessee: 

Potential Benefits to Buyer/Lessor:

  • Can provide an additional tax deduction
  • Enables a company to expand its business
  • Can help to improve the financial records
  • Limits volatility risks of owning the property
  • BEE compliant companies/investors can dramatically increase your BEE procurement spend and improve your scorecard
  •  Guaranteed lease
  • A fair ROI (return on investment)
  • Stable income stream for a specified period of time
  • Buying an income-generating property at an attractive yield
  • Longer lease terms equate to a higher value in comparison to a vacant building

Property transactions such as a Sale and Leaseback require high levels of specialised knowledge and skill and normally means making a long-term commitment. We will, however, assist the owner in determining the correct market-related rental to apply to the leaseback which we will then use to provide an assessment of what a willing investor would be prepared to pay for the property.

Contact Wessel Muller or Andre Theron by clicking here for further advice on the Sale and leaseback of your property.

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