Turn Your Building into Cash with Sale / Leasebacks
Featured Story Excerpt from Corporate Real Estate Strategies | Issue 34
The question of funding public and private sector projects is often a challenging one, given the current fiscal environment, but a powerful tool is often overlooked: Sale / Leasebacks.
In the public sector, Sale / Leasebacks are situations in which a municipality or other government entity transfers a property it owns through a sale for cash and simultaneously executes a lease on the same property. Sale / Leasebacks are both a financial and real estate transaction that allow a community, county, or state government to capitalize on its creditworthiness.
Why Communities Use Them
Sale / Leasebacks allow a community to productively use the capital that would otherwise remain locked up in its real estate assets. If a community believes it could better use the capital tied up in a city hall building or other properties for improvements to the community or for other financial obligations, Sale / Leasebacks could be extremely helpful.
Often communities are surprised to discover that the value of their real estate equity and cash from Sale/ Leasebacks can be used to finance new public facilities, make improvements to existing ones, or upgrade community infrastructure. Sale / Leasebacks have also proven effective in bridging budget gaps and increasing bond ratings and capacity. Notably, the capital from Sale / Leasebacks can be used in any way the community wishes. In today’s economy, this flexibility can be critical.
How Sale / Leasebacks Work
By way of example, let’s say a county requires funding for the renovation of a county building and courthouse of approximately 100,000 square feet.
A Sale/Leaseback transaction to obtain funds needed for the municipal improvements includes the following steps:
- The county would sell the property to a financial institution for more than its value would be without a county lease.
- The county would sign a 30-year lease with the financial institution in exchange for the cash payments.
- The entire financing process would be concluded within 60 – 120 days at minimal cost and risk.
- The financial institution would collect the rent specified in the agreement while the county would gain budgetary stability with established rent costs for 30 years.
- The county would use the proceeds from the sale to make renovations to the county building and courthouse and use any residual amount for other county expenses/improvements or investment purposes.
Sale / Leasebacks vs. Bond Financing
Traditionally, communities raise funds by issuing bonds. Sale / Leasebacks are not intended as a replacement for issuing bonds but as an alternative to be used when and where appropriate. As is the case with bond financing where the community must pay off the bond, the community must make lease payments in a Sale/Leaseback transaction.
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