In a Sale & Leaseback transaction, a property used for business purposes is sold and simultaneously made available for use by the seller under a lease or rental agreement.
The most common buyer in a Sale & Leaseback transaction is a financial institution. Upon completion of the transaction, the seller of the property is obliged, as a tenant, to pay the rent and all other costs and expenses associated with the maintenance of the property, such as property tax or utility costs. The buyer, on the other hand, obtains the title to the property and a fixed rental income.
Typically, warehouse/logistics properties, shopping malls and office buildings will be the subject of Sale & Leaseback transactions.
There are two basic types of Sale & Leaseback transactions. One can be referred to as rent-back. This involves selling the property and renting it back (without securing the right of repurchase at the end of the rent term). The other type is the classic leaseback, where the lessee has the right to repurchase the property at the end of the lease term. In this case, as part of the monthly payments, in addition to the financing costs, the lessee repays part of the value of the property.
In our practice, we are seeing a growing number of Sale & Leaseback transactions. Their main benefits are that companies can free up funds and obtain capital to be used according to current needs (e.g. to expand their business or pay off current liabilities). For the seller, this is an easier way to obtain financing than a bank loan, whereas from the buyer’s perspective the investment is at lower risk, as the subject of the investment is an asset that guarantees a stable rental income.
In Sale & Leaseback transactions, vetting the property being purchased is one of the critical aspects. A key issue is to ensure there are no potential defects in the property, which, in the long term, may make it difficult or impossible to exploit its full potential. Moreover, in parallel with the purchase of the property, the buyer is to be guaranteed a stable income from the transaction and hence the seller’s financial situation will be relevant. For this reason, we recommend that a legal due diligence investigation of both the property and the seller is carried out to assess the full potential of the investment.
Although the investment model in question is based on a sale agreement and a lease, rental or leasing agreement, in practice certain issues are regulated differently. The main difference is the distribution of the rights and obligations of the parties with regard to the management of the property. Given that the seller was using the property prior to the transaction, it is usually most convenient to oblige the seller to continue to manage the property. This is not only due to the seller’s familiarity with the property, but also due to their relationship with the providers of maintenance and other services for the property. This is further justified if the property can be repurchased after a certain period of time.
In summary, Sale & Leaseback transactions are becoming increasingly popular, due in particular to the following benefits:
- As a rule, cheaper and larger capital can be obtained for investment, compared to mortgage-secured loans,
- the property can continue to be used in exchange for rent; it can be repurchased in the future, at the end of the leasing term,
- existing investments can be refinanced, allowing less favourable loans or credits to be repaid.
Do you have any questions? Contact the author: Paweł Cholewiński, Weronika Duda