Many business owners reach a point where they need additional capital to fuel growth. Traditional means of doing this include raising equity or taking on more debt. One of the more under utilized options for businesses that own their own real estate however is the sale-leaseback.
A sale-leaseback involves a business selling its real estate to a third party and immediately leasing it back from the buyer. The proceeds of the sale can be utilized for expansion of the business by adding more locations or product lines amongst other things. Sale-leasebacks are similar to taking out a mortgage against the equity built into a property with the cap rate at sale being the interest rate. The cap rate will vary depending on the lessee's credit, property location, and lease terms being offered. Better credit and longer lease terms equate to a lower cap rate and therefore lower cost of capital to the business owner.
Unlike mortgages, the business owner can pull out 100% of the property's value. Another advantage over traditional financing is off balance sheet treatment if the leases are structured correctly. It's also usually a better option than raising more equity due the dilution of the owner's interest in their business that occurs in that case.
There are many instances where traditional financing is either unavailable or not desirable and the effective cost of raising equity is just not palatable. This is where a sale-leaseback is often the best avenue for raising capital.
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
