Sale and leaseback - what, why and how

A sale and leaseback is where a business sells an asset while simultaneously agreeing to lease it back on a long-term basis, allowing the seller to release capital from their assets while retaining operational control and use. Originally developed for real estate, sale and leasebacks are now used across multiple asset classes, from property to aircraft and equipment.

These transactions are particularly attractive in the current market, where borrowing rates are higher, loans less accessible and where businesses seek to optimise their balance sheets while maintaining operational stability.

Sale and leaseback often proves attractive when :-

• The seller has reasons to stay in a property - such as a long and highly established presence in the property which is important to retain, seller wants to minimise disruption and flexibility to negotiate favorable terms possibly including renewal/purchase rights

• Traditional lending is unavailable or too expensive - offers an alternative source of capital

• The seller wants to avoid additional debt - improves balance sheet position

• Property values are high but yield requirements are low - maximizing capital release

• Operational flexibility needs to be maintained - business continues as usual

• Tax efficiency is a key driver - can offer advantages through tax deductible payments

Commercial property sale and leaseback

Most commonly used for:

• Office buildings - particularly headquarters or major operational sites

• Retail premises - from single units to entire portfolios

• Industrial units - including manufacturing facilities and processing plants

• Warehouses - especially distribution centers and logistics facilities

• Hotels - often combined with management agreements

• Healthcare facilities - including hospitals and care homes

Residential property

Sales and leasebacks are less common but increasing in specific sectors :-

• Build to Rent developments - purpose-built residential rental schemes.

• Care homes - operational healthcare properties.

• Retirement living - specialist accommodation with care provisions.

• Social housing projects - local authority or housing association stock.

• Mixed-use developments - such as retail/residential or office/residential schemes.

Alternatives to sale and leaseback

Before choosing sale and leaseback, businesses should consider:

• Traditional commercial mortgages - typically lower cost but require debt on balance sheet

• Corporate bonds or other debt instruments - may offer better terms but require strong credit rating

• Raise money by issuing shares - avoids debt but dilutes existing shareholders.

• Asset-based borrowing - can be more flexible but often more expensive

Potential disadvantages and risks

• Ongoing payment obligations - long-term financial commitment

• Reduced flexibility for modifications - requires lessor consent

• Impact on future borrowing capacity - long-term lease commitments

• Future payment reviews and market changes - possible cost increases

• Lease constraints on operational changes - reduced flexibility

• Potential impact on credit rating - treatment of lease obligations

• End of lease considerations - replacement or renegotiation costs

How we can help

Our large and very experienced property team provides comprehensive support for both buyers and sellers including:

• Structuring the transaction - optimising terms for your needs

• Negotiating terms - achieving best commercial outcome

• Drafting and reviewing documentation

For a confidential discussion about your sale and leaseback requirements, please do contact us.