Sale and Leaseback: an alternative and fast source of raising capital

15 January 2024 | Knowledge, News, The Right Focus

Sale and leaseback transactions are becoming increasingly popular with companies, and for good reason as they offer the opportunity to raise financially attractive capital relatively quickly. Quick, because the transaction is based on the company’s real estate assets (mainly warehouses, production halls, etc.), while the process does not require any suspension of business or change of location, as the company continues to operate in the same, familiar conditions. This, of course, eliminates any possible additional complications associated with, for example, organising a move or furnishing and equipping a new office or production hall. This is, against all appearances, a major benefit and advantage of such a solution.

What is a sale and leaseback

In a sale and leaseback transaction, a company sells its property to an investor (usually a financial institution) who, simultaneously with the purchase, leases the property back to the former owner on the basis of a long-term lease, rental or leasing agreement.

From the time the transaction is completed, the seller, as the lessee, is obliged to pay rent and any other costs and expenses related to the maintenance of the property, such as property taxes or utilities to the buyer, who on the other hand, receives the legal title to the property and a steady rental income.

A successful sale and leaseback transaction provides a company with significant capital that can be used for any purpose – either to fund ongoing operations or for investment – without losing the use of the property or disrupting day-to-day business.

Warehouses, logistics centres and office buildings are the most common assets for this type of deal.

Sale and leaseback with buy-back option

There are two basic types of sale and leaseback transactions.

The first is to sell the property and then take it on lease (without securing the right to buy it back at the end of the lease).

The second type gives the lessee the right to buy back the property at the end of the lease. In this case, the lessee repays part of the value of the property as part of the monthly payments, in addition to the financing costs.

Sale and leaseback – specifics of the transaction

Recently there has been increased interest in sale and leaseback transactions.

For the seller, this type of financing is easier to obtain than a traditional bank loan. From the buyer’s point of view, it is a lower-risk investment because the transaction involves an asset that guarantees a steady rental income.

However, when deciding on this type of contract, it is important to pay attention to the elements that will be crucial from a security point of view.

One of the most important is the inspection of the property to be purchased. This will shed light on any potential defects in the property that may, in the long term, hinder or prevent it from being used to its full potential. Such information is of great value to both parties to the transaction. The owner of the property who is aware of the existence of potential defects, can rectify them before entering into discussions with the investor, while the investor, in turn, can change his decision, modify the price, or change the terms of the transaction, thereby reducing potential risks.

Another issue, particularly important for the investor, is the financial standing of the seller, who, as a lessee, should be able to provide a steady income to the investor. Given the issues outlined above, it is essential to carry out thorough legal due diligence of both the property and the seller in order to assess the full potential of the investment.

Advantages of sale and leaseback:

  • Obtaining capital (e.g. for investments, current liabilities, etc.) that is financially attractive compared to, for example, a mortgage-backed loan
  • The right to buy back the property at the end of the lease
  • Continued use of the property in return for rent payable to the financial institution
  • Possible refinancing of existing investments – repayment of less favourable credits or loans

Sale and leaseback – how we help

We can provide comprehensive support throughout the process, from assisting in the selection of a financing institution to providing full legal services for the transaction and in particular, during the drafting and negotiation of the relevant transaction documents.

We will be happy to arrange an individual consultation for you.

Questions? Contact us

Marcin Bęben

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Contact us:

Paweł Cholewiński

Paweł Cholewiński

Attorney at Law, Partner, Head of Transactional Practices Group / Real Estate, M&A

+48 883 323 475

p.cholewinski@kochanski.pl

Marcin Bęben

Marcin Bęben

Head of Business Development

+48 880 438 247

m.beben@kochanski.pl