Should I consider a sale/leaseback as an office user? Let’s first define a sale/leaseback. In this type of transaction, as the property owner, you would agree to sell your building to an investor after having signed a lease, generally 3-7 years, to remain in the building as the tenant.
Here are a few reasons why it’s worth your consideration as an office user:
- Selling your building in this manner helps free up capital and converts equity into cash for the business today. In a sale/leaseback you don’t have to be concerned about moving your business or finding new office space. Rather, you are free to remain right where you are without missing a beat of business.
- A sale/leaseback can help you prepare for the future of the business (say 3-7 years from now), when operations are winding down; whether you’re headed towards retirement or your format is trending towards non-traditional office space (home office, co-working space, etc.), a sale/leaseback helps prepare you for the future. You can generally capitalize on a higher valuation for your property in this scenario than if you were to sell it vacant. Your tenancy as an office user helps stabilize income for the investor and therefore adds value to the sale!
- This solution is a great alternative to conventional financing. You can usually structure the initial lease type, term, and renewal options to your benefit circumventing the limitations of conventional mortgage financing. Full-service and modified gross are traditional lease types for offices, although an investor may want to negotiate NNN. (Learn about all the different lease types!)
- Sale/leasebacks can provide helpful tax advantages for an office user’s consideration. Mainly, rental payments under the lease are fully deductible! Any gain on the sale is subject to capital gains tax depending on how you manage the proceeds. It is best to speak to a CPA about these specifics.
- If your business doesn’t need to convert the equity into cash, consider a 1031 exchange to defer capital gains from the sale. This is worth your consideration if there is an individual or synergetic desire to invest in commercial real estate.
- Selling your property alleviates the risk and burden associated with ownership like maintaining structure, HVAC, multi-tenancy (acting as the Landlord), property tax, property management, etc. You’ll also alleviate your balance sheet by increasing the ratio of an asset to a liability.
- A sale/leaseback gives you the freedom to meet demand/business needs (e.g. technological, locational, functional, geographical etc.) by relocating at the end of the lease term. How are the future of your business and client/employee satisfaction shaping your future office considerations?
To learn more about Sale/Leaseback transactions and to hear more about a real-life example, take a look at LTP Property Lines.
Give us a call to learn more about how this can work for your office specifically.
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