For property owners looking to gain income streams from their property investments, there are plenty of ways to generate a positive cash flow. One of these is through the sale and leaseback strategy. In this blog, we will take a closer look at what this strategy is all about.
Sales and leaseback: What is it?
Owning a commercial real estate asset means that capital is tied down to the property. One way property owners fix this problem, especially in times of liquidity crunch is through the sale and leaseback strategy, which essentially means selling real estate and renting it afterward from the buyer.
When the capital is released, it can be added back into the company for the sake of the business or used for other purposes. The sale and leaseback strategy allows the owner of the real estate to sell the property to an investor who would immediately lease it back to the previous owner, who becomes the new tenant.
Freeing up capital
One of the biggest benefits to this strategy is that it can inject otherwise dormant capital back into the business operations, allowing businesses to do more by using it as working capital. This has been a popular strategy for a number of businesses during the COVID-19 pandemic.
While the asset can be mortgaged for additional capital, most banks and financial companies do not release its full amount, sometimes just up to 60% of its total value. But through a sale and leaseback, the business can then receive 100% of the asset’s value which cannot be gained anywhere else.
Unlike loaning the property for a mortgage, the lease terms can be negotiated with the new owner of the property. The lease is usually linked to the realizable value of the asset.
Under this lease agreement, rental payments and other outgoings are clearly outlined for better forecasts for the business. There can also be advantages from a tax perspective. Rental costs in this case are offset as operational expenses, meaning they can be deducted in full versus a traditional loan where only the interest payments are tax-deductible.
Make the most out of your real estate
Whether it is to buy, sell, or make your property an income-generating one, turn to an experienced real estate services firm like Santos Knight Frank. Our real estate organization has a great track record of serving clients with services such as occupier services & commercial agency, investment & capital markets, residential & sales leasing, property marketing, research & consultancy, valuation & appraisal, project management, asset management, property management, facilities management, technical services & engineering solutions. Just visit our website and speak to our real estate practitioners at https://santosknightfrank.com/.
If you want to know more about leasing, you can also read about Lease Administration And Why It Matters For Every Company.