Versatility is a key feature of today’s financial world and real estate market. People look for ways not only to maintain a certain status in their branch but also make a profit and preferably keep developing a business or grow their family. This is why possessing some sort of cash capital is exceptionally vital and people constantly look for ways to retain theirs or even increase it.
Getting a lump sum for your property is generally associated with mortgaging or selling. Both cases can be quite convenient but more often than not the negatives might outweigh the positives. Mortgaging is related to numerous obligations and your very property is used as collateral. If you sell, then you lose ownership of the property. Sale and leaseback on the other hand is a transaction which is fairly popular and can yield outstanding results. It allows the owner of a property to sell it and lease it immediately thus keeping exclusive possession and use over it.
This a very well-known practice among small and mid-market businesses looking to expand. It allows them to liquidate their assets in which they have already invested. This way 100% of the fair market value of the estate is extracted. In the process the seller also becomes a tenant in the property. Typically a long-term lease is negotiated and this allows for no disruptions to operations. During sale and leaseback the tenant (the seller) basically manages the property as if they owned it. The company remains responsible for repairs, property taxes, utilities and maintenance.
The best part is that you get paid in full for your property and you stay in it for the duration of the lease. Citizens and their families can also greatly benefit from a sale leaseback as it is not reserved only for businesses. Selling your home and looking for a new one can be quite the ordeal. Such a challenging task requires you to be a seller and a buyer at the same time. You will have to rush into closing both deals pretty much at the same time. By conducting a sale and leaseback you do not need to downsize or even move. When you become a tenant you remain in your neighbourhood and you get paid in full for the equity you have established through owning a home.
This can be a great source of income as this lump sum can be allocated wherever you have the greatest needs. You don’t want to have the growth of your business impeded by the inability to access capital. The more popular methods of traditional financing hold risks and are typically trickier then they look. There’s no collateral involved when we talk about sale and leaseback and there is no debt to repay. Other forms of financing will give you just a percentage of your market value, will also require you to maintain a certain net worth, deal with monthly installments, interest rates and many more. With a sale and leaseback you are responsible only for keeping the property intact and you only have your lease to cover. The lessor (owner) is now responsible for paying most taxes and also for making sure the property is free of legal obligations and liens. A key clarification here is that the lessee is protected from residual value risk.
As the property is sold, ownership is being given up, but the leaseback that follows can be of two possible types – operating or finance. In case the proceeds of the transaction are greater than the carrying value of the asset but somewhat equal to its fair value, then the company sells and leases back the asset recognising a net profit equal to the difference between the price of the sale and the carrying value. This is an operating leaseback as there is no ownership to talk about during the lease period. If the proceeds are equal to less than the carrying value of the property, the company recognises a loss and these very proceeds can be recognised as a long-term loan which is going to be repaid over the period of the lease. In this case the seller never gives up ownership of the asset but simply turns into a lessee.
Lease and rent are not one and the same even though they might share similar characteristics. In order to fully understand the sell and leaseback approach, we will have to define and explain the differences between the two. When an asset is leased, this is usually done for a longer period of time – 10, 20 years. For the duration, the lessor rarely interferes or visits the property unless they have to. The lessee has the obligation to act as if they are the owner of the place. The payment terms are set and the lease can be paid monthly or annually. In some cases we can witness the so called “bargain purchase option”. It allows the lessee to take ownership of the property after the lease expires. Of course, every sale and leaseback deal is negotiated differently and some might still include a certain price (percentage of the market value) to be paid in order for the lessee to become an owner.
Rentals are short-term deals during which it is perceived that the asset will not be needed long-term. This can be quite useful if you do not want to tie yourself with a certain asset for many years. In some fields assets can become outdated or obsolete in the matter of years or even months. Versatile businesses do not want to be stuck and even though a renting might be the more expensive option, its short duration is what is attractive. On the contrary, a lease is the far more affordable and convenient option if a property is essential to your operations. The owner of the property is obligated to keep track of the rental costs and expense them on their income statement. Pretty much every country in the world requires that for tax purposes as well as accounting ones.