Both the buyer and the seller will benefit from a sales and leaseback because the seller will immediately be able to collect a lump sum of cash and the buyer will purchase a lower value than the market and an attractive return on long-term leasing. However, like with most things in life, a sale and leaseback have several advantages and cons.
Sale and leaseback is a transaction in which a business sells its assets to another and then leases those assets back to the original business. The company selling the asset becomes the lessee, while the entity buying the asset becomes the lessor. The lessor is usually an insurance firm, a financing company, a leasing company, a limited partnership, or an institutional investor in this sort of transaction. It is when a corporation intends to sell and occupy a building while engaging in a rent agreement with a building buyer. In other words, the original owner sells the property to an investor who becomes his owner instantly. These are frequently an alternative to normal bank financing as they allow the property’s owner/occupier to release investments into a property and use the funds obtained for other more profitable and immediate applications.
What is suited for the sale and leaseback of firms and properties?
- Single occupant properties
- Properties such as business, retail and industrial properties
- Investors can raise a better capital sum for companies with a strong trade history and healthy balance sheets
- Tenants willing to lease at or about the prevailing market rent for a minimum of five years or more
Cost of sale and leaseback
After a property has been acquired, an investor undertakes to rent the property at an agreed cost from the seller. The standard rental terms for sales-leasebacks are between 5 and 10 years to ensure that the investor can get adequate time to make an investment. In Vietnam, investment yields might vary from 8 to 11% for these transactions. After the closing, the buyer is able to rent back the property to the sellers, allowing them to remain in the home for a predetermined period of time. If the sellers haven’t purchased a new home before their current one closes, they may find themselves in this situation. There are many types of sale-leaseback agreements, in which a previously owned asset is sold and then leased back to the original owner for a long period. Business owners can continue to use a key asset in this way, but they are no longer the legal owners of that asset.
Buyers who want to stand out in a competitive housing market can use a leaseback agreement to their advantage. There are a few things that must be worked out before a leaseback can begin.
Sale-leasebacks are actually two transactions in one: sale or purchase of the capital is the first transaction. Upon signature of the Sale-Purchase Agreement (SPA), both parties must also conclude the Lease Agreement. The SPA and leasing contract are strongly linked, as the sales price specified in the SPA should make it possible for the investor to obtain excellent returns on the monthly rental rates set out in the lease agreement.
If an investor buys a warehouse of 30,000 m2 of $18 million and leases it back at US$4.5 m2/month to its prior owner/tenant, the first year will achieve a net start-up yield (NIY) of 9 percent. Note it’s a rental return. The investor should execute a discounted cash flow to assess his true internal return rate (IRR) (DCF). The IRR return would be below the rental return, because other expenditures, such as maintenance and operating expenses for the asset, must be taken into account. The rental increases indicated in the leasing contract are another crucial aspect. Whether the growth after the first year is 3 or 5 percent, at the conclusion of the 5 years or 10 year term the investment return will have a big impact.
For instance, if after the first year there is an increase in yearly rental of 3% over 5 years, the result is the following:
In view of the timing of the negotiations and the number of agreements to be concluded, it should be noted that a professional immovable agency supports both parties to the transaction.
The agent can help to establish whether the sale price matches the current market. In the development of the new lease agreement, the agent will also play a significant role, making sure that all terms and yearly rate increases are appropriate and market-oriented.
These terms must also be suitable for the lenders and must deliver a satisfactory rental return for their investors or loans.
S&L transactions have been popular for decades because they offer advantages to both the seller and the buyer. FASB has issued new standards for revenue recognition and lease accounting in recent years, which have significantly altered the accounting for such transactions. The new lease accounting standard issued by the FASB has made it easier to determine whether control has passed from a seller-lessee to a buyer-lessor when assets are being constructed. These provisions may be difficult for accountants who prepare financial statements for organizations with complex leasing arrangements to put into practice.
After the lease period finishes, what will happen?
A sales lease is usually lengthy-term, providing sufficient time to establish what to do after the lease has expired. Depending on how the two parties have handled the arrangement, there are possibilities when the sale lease contract expires. If the leaseback arrangement is an equity lease, the renter can own the equipment free of charge and without further responsibilities at the end of the lease period.
Who’s supposed to make a sales-readiness?
With the emerging economic impact of the pandemic, corporations are increasing their financial savings for emergency requirements and core activities. The number of immobilizers and shipping businesses is growing, with the effect that cash is accumulated. They are permitted to maintain their facilities by using leasing backs.
Businesses that regularly use sales leasebacks often own high-cost fixed assets, such as immovable and industrial equipment. Blue-chip businesses, multinational companies, institutional funding, industrial developers, and landlords are often the companies selling leasebacks.
Get in touch with the team at Funding Bay to find out how much will sales and leaseback cost your business!
