Are there any advantages to using sale-leaseback as a way to raise capital? Are there any advantages or disadvantages?

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RK Kliebenstein
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Coast-To-Coast Storage
P: 561.963.4004x81
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Generally Sale leasebacks is a good method to get your equity out(liquidity). But generally the leaseback periods can be long and cumbersome. The ones I have dealt with on commercial properties in the past have been somewhat painful. With the market today and the liquidity issues out there I think this may be a bad time to condiser this option unless you really need liquidity.

While I have not done a sale leaseback I am familiar with sale leasebacks being used in other product types of commercial real estate. The last posting is correct in that they are mostly used to maximize liquidity but that is only half the reason for doing a sale leaseback.

Most of the sale leasebacks that I have seen are structured so that the owner selling his property on a sale leaseback also has the option to purchase back the facility at certain strike prices throughout the term of the lease. Let's look at an example: A Self storage facility is sold to a 1031 investor or a REIT (not necessarily a self storage REIT) for $4,000,000 with an annual lease payment of $360,000 per year (9%) for a term of 10 to 30 years with lease payments increasing with inflation or CPI( about 3%). The seller (now an operator) also has an option to buy back the facility after "x" years at a price of $4,000,000 plus an annual appreciation rate of 3%. This would give the 1031 investor or REIT a 12% annual return. The reason the operator structures the sale leaseback with an option to purchase is to be rewarded for his efforts in maximizing the financial potential of the site. The operator believes he will find a buyer willing to purchase the facility for more than the strike price. If the operator finds a buyer at $6,000,000 when the strike price on the purchase might be only $5,000,000, the operator makes a cool $1,000,000. To accomplish this the operator would do a simultaneous purchase from the 1031 or REIT owner for $5,000,000 and then sell to the purchaser for $6,000,000. The operator is justly rewarded for successfully managing and selling his self storage facility.