How to Use the Sale-Leaseback When Other Forms of Financing are More Costly


How can you use the sale-leaseback method when other forms of financing are more costly? If the money market will support your financial needs at reasonable rates through more conventional forms of mortgaging, there may be no need to look elsewhere. However, due to any number of circumstances, a reasonable or sufficient loan may not be available.

Specialty types of real estate fall into categories that many lenders will shy away from, or at best they’ll quote high interest rates and low loan-to value amounts. The combined effect of insufficient restructure of existing debt and high constant payments on the borrowed funds may put the borrower in deeper trouble than that in which he currently finds himself.

During this same time when the money market is tight, interest rates touch, and loans low or nonexistent, there may be a solution via the sale-leaseback. Your ability to determine the effectiveness of the sale-leaseback will require you to examine the effect the two forms available have on the situation. In high-risk or specialty investment properties for example there tends to be high point costs 1-3 point spread and interest can be set well above prime. On the other hand, a sale-leaseback may produce 100% or more of the cash needed at an overall interest rate that is lower than that charged by lenders.

Inherent risks in a sale-leaseback to consider

You will need to recognize and weigh the cost vs benefit of the ability to earn money on the input of new capital vs the cost of the loan. There are some inherent risks in a sale-leaseback to consider. There are valid reasons for the leaseback. But the risk involved, due to the value adjustments, requires buyers to be rather cautious of overstated values of the fee or of the leasehold. It is possible for the seller to substantiate the value of the fee by creating the fixed returns with a minimum of risk to the buyer. This can be accomplished with lease insurance. The insurance will cover the rent in default should the seller/tenant get into trouble. What could be a bad deal can become a great transaction.

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