In this article, we will discuss how the sale and rentback of commercial property work, what to look out for in a rentback arrangement, and how to strike the right balance between the speed of selling and agreeing to favourable terms.
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How Sale and Leaseback Works?
Imagine you own a shop or a restaurant. It’s your business, and you’re the boss. But sometimes, businesses need extra money to grow or to pay for things.
One way to get that money is through something called a “sale and leaseback”. It’s a bit like renting your own shop or restaurant, but with a twist.
Here’s how it works:
You find someone who wants to buy your shop or restaurant building. They pay you the money for the building, so now they own it. But you don’t have to move out!
Instead, you pay them rent every month or year, just like you would if you were renting from someone else. The difference is, you used to own the building, but now you’re renting it from the new owner.
Before you do this, you’ll need to get someone to work out how much the building is worth. This person is called a chartered surveyor, and they know all about buildings and their values.
The surveyor will also tell you how much rent you should pay each month or year. That way, it’s fair for both you and the new owner.
Once you know the building’s value and the rent amount, you can decide if you want to sell your building to a private person or to a special kind of investment account called a SIPP.
A lawyer who specializes in commercial properties will help you with all the paperwork and legal stuff. They’ll make sure everything is done properly and that you and the new owner agree on the terms.
After all that, the sale and leaseback can happen. The new owner buys your building, and you start paying them rent to stay there and run your business.
It’s like getting a big lump of money upfront, but still keeping your shop or restaurant. Pretty good, right?
When Should You Consider To Sell and Rentback?
So why would a business want to do this? Well, there are a few reasons:
First, they might need that money to buy a new property for their business. Or maybe they want to use the money to grow their business in other ways, like opening new shops or hiring more people.
Another reason is if the business is having some money troubles. Selling the building and getting that cash can really help them out of a tough spot.
Sometimes, businesses also do this because they want to focus on their strengths, like running their shops or making their products. Owning buildings and dealing with all that can be a distraction from their main goals.
By selling the building but still being able to use it, they can put all their attention on the most important parts of their business. Pretty smart, right?
So, a sale and leaseback agreement is like a way for businesses to get their hands on some extra money when they need it, while still keeping their shops or offices to work in. It’s a win-win situation!
Sale And Rentback Pros & Cons for Buyers and Sellers
These are pros and cons for seller and buyer when entering a sale and leaseback arrangement.
For the Seller (the business owner): The pros:
- You get a big lump sum of money from selling your building.
- You can use that money to grow your business, buy new properties, or get out of money troubles.
- You still get to stay in the building and run your business as usual, but without owning it.
The cons for the seller:
- You have to pay rent to the new owner every month or year.
- You don’t own the building anymore, so you can’t make big changes to it without asking the new owner.
- If you want to move out later, you might have to pay a fee or give plenty of notice.
Pros and Cons of Sell And Leaseback for the Buyer
So, these are some of the good and not-so-good points that both the seller and the buyer should consider carefully before agreeing to a sale and leaseback deal:
Pros | Cons |
You get to own a building and earn money by renting it out. | You have to make sure the building is well-maintained, which can be expensive. |
The rent payments from the seller will give you a steady income. | If the seller’s business struggles, they might not be able to pay the rent on time. |
If the building’s value goes up over time, you could make even more money by selling it later. | You can’t make big changes to the building without the seller’s permission, since they’re still using it. |
Understanding the pros and cons is important to make the best decision.
Consideration for the Lease terms
Let us explain some key points about negotiating a lease in a way that’s easy to understand:
The Rent
One important thing is how much rent you’ll pay each year and when you need to pay it. The buyer, whether it’s your pension fund or someone else, will want the rent to be the same as similar properties.
Usually, you pay the rent every 3 months in advance, on dates like 25th March, 24th June, 29th September and 25th December. But if it suits you better, you could pay a smaller amount more often, like every month on the 1st.
The Lease Length
The lease is usually for a long time, between 5 and 35 years. A longer lease is better for the buyer, but it means you’re committed for longer too.
Rent Reviews
The rent won’t stay the same for the whole lease. There will probably be a rent review, where the rent goes up based on things like market value or inflation.
The buyer can even backdate a rent increase if they miss the review date, so be careful!
Break Clauses
You’ll probably want a break clause, which lets you end the lease early if the new rent after a review is too high. Break rights often happen every 5 years.
But there are conditions, like paying all the rent you owe first. You’ll also need to give the buyer plenty of notice, maybe 6 months.
Repairs
How much you need to repair depends on the condition of the property. If it’s not in great shape, you might only have to repair what’s listed.
Alterations
Think about if you need to make changes to the property for your business. The buyer might want you to remove those changes when the lease ends.
Is Sale And Leaseback the Right Choice?
This depends on your business circumstances and financial goals:
Using Money Wisely
Every business needs to be smart about how it uses its money. Sometimes, it might not make sense for a business to keep owning a building like an office or a shop.
Maybe that money could be better used in other parts of the business. Or maybe the business really needs cash to avoid going bankrupt.
The Sale and Leaseback Option
More and more businesses are opting for a “sale and leaseback” option, which is a way for them to get cash quickly.
Here’s how it works: The business sells a property it owns, like an office building. But instead of moving out, it signs a new lease to rent it from the new owner.
This gives the business a big chunk of money from the sale. And they can keep using the building, just as a renter instead of the owner.
Improving Cash Flow
A sale and leaseback can really help a business raise more cash. That extra money could be exactly what it needs to keep going and avoid serious financial problems.
So even if you haven’t heard of it before, a sale and leaseback is an option worth considering. It might be the solution your business needs to improve its cash flow situation.
Before proceeding, please make sure you understand all the details and that it’s the right choice.
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- These valuations or surveys result in delays and price reductions later on.
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