If you own a business that owns real estate, there is a highly efficient way to raise capital that in many ways is superior to traditional financing. Many of you have heard about the “Sale leaseback”. If you Google that expression, you will see a gaggle of positive articles.
As a new attorney and real estate broker, my first deal was a sale leaseback that raised sufficient cash to keep U.S. Home, the nation’s largest home builder (in 1973), afloat and able to make payroll. We sold our new office building at a record price, because we agreed to sign a long term attractive lease back. Yet our business was uninterrupted because we simply leased the building back.
But that was just one use of this terrific real estate technique. When I wanted to sell in 1989 several shopping centers developed by my company, and join Jack Kemp as COO of the FHA, (and later CEO of RTC Oversight Board under Presidents Bush and Clinton), I once again used a sale leaseback to sell the centers at a great profit, and then lease them back to be run by my company.
There are innumerable ways in which sale leasebacks can serve many of us today–particularly because of uniquely favorable commercial real estate values and the availability of low interest rates, 10 year loan terms and 20 year amortization schedules.
Let me describe a really neat use of sale leasebacks, which I have been encountering as a baby boomer (actually, I am a little older and qualify for “silent generation” status -born in World War II). Many of my attorney colleagues are thinking of retiring at 65. But they are only thinking. Many want to continue practice for another 7-10 years. They have discovered the sale leaseback as a great option. They sell their office at a higher price than market, because their lease back (the longer and more creditworthy the lease, the higher the price) appeals to investors. Investors borrow to buy the office and use the rent to pay debt service to pay down the mortgage as the property and their equity increases. The IRR’s are solid double digits, and low interest rates keep leaseback rents low. Everyone wins.
What about the taxes on sale? you may ask. There are many ways to defer gains arising from depreciation (taxed at ordinary income rates) and capital gains. The most common is the “1031 like-kind exchange”. To be a bit morbid, taxes can be deferred this way until death, at which time most properties receive a “stepped up basis” so that taxes can be largely avoided altogether. Don’t do a sale leaseback without advice of tax counsel and/or your CPA.
There are so many salutary uses of sale leasebacks, that this could become way too long an article. To give just one more example, a multitude of companies use sale leasebacks to clean up their balance sheet–cash and retained earnings increase, mortgages can be paid off and if deemed an”operating lease”, the lease liability becomes a mere footnote on the balance sheet.
I have probably exceeded the allowable length of a post, but if anyone would like to discuss this subject, I have quite a bit of experience as a commercial real estate broker and Florida attorney. Plus I would like to learn more. Perhaps a blog on Linked In would be welcome. Please let me know by calling my cell at 727-643-6303. Have a nice evening.
Peter Monroe