Typical parties for this type of transaction would include:
A business owner, who owns the real estate where his company is located, but would like to liquidate and use the cash for business growth and expansion.
A Buyer / Passive Income Investor who is looking to purchase property which will provide immediate, long-term cash flow and increased property value because of the long-term lease.
A businessman (the Seller) generates returns from, and through, his business and not from real estate. In selling a commercial asset and then leasing it back from the Buyer, the Seller gains corporate liquidity. These funds, which were otherwise tied up in real estate, can be redirected toward company growth and expansion. The Seller, in the case of a sale / leaseback, does not have to risk relocating his business which is sometimes devastating to the company bottom line. Also, because the Seller is a businessman, the increased revenue that can be generated by expanding his company will usually show far greater returns in a much shorter time, than the real estate. The real estate debt will be removed from the Sellers balance sheet improving his credit standing as his debt-to-equity ratios improve. Tax obligations (and deductions) may be more favorable with leasing than with owning.
A passive income commercial real estate investor (the Buyer) is in the business of investing in cash-flow properties. Unlike the business owner, his focus is primarily in securing cash flow from a property as well as increase in property value through acquiring long-term tenants. Investors/Buyers often seek out commercial real estate that can be leased back to the seller as it provides them with a quick and sure return on their investment. This arrangement gives them the guarantee of tenancy and avoids an empty property while a lengthy marketing campaign ensues. The commercial property will increase in value at the close of escrow because the Buyer will have a long-term tenant in place; therefore, the Buyer may be able to secure additional lending against the property due to this increased value. In reality it is, most of the time, a win-win scenario.
Points that a Seller (of the property) and Buyer (of the property) should consider before entering a Buyer / Leaseback Arrangement:
The Seller must be credit worthy so the Buyer has confidence in the leaseback arrangement.
The Seller should expect to sign a long term lease agreement so the Buyer can gain value in the property with a long-term tenant.
The Buyer should be willing to offer the Seller a long-term lease agreement.
The Buyer will often provide a below-market rent to the Seller in consideration for the long-term lease commitment.
The Seller can often expect the Buyer to negotiate a below market price for the property.
The Seller should expect rent increases every year, and should make the sale contingent on fixed terms.
The Seller should also assure that extension options are written into the lease.
The Seller should ensure that the lease will survive any future sale of the property (by the Buyer) as well as sale of the business/company (by the Seller.)
The Buyer will typically demand stiff penalties if the lease is broken early.
The details of the Agreement should be carefully written with a clear strategy benefitting both parties. Buyer and Seller should use experienced Real Estate Specialists who specialize in Commercial Real Estate. Both parties should seek legal counsel and a professional tax specialist with experience in this type of transaction. If the strategy has been well structured with a reasonable asking price and a reasonable rent for the seller, the entire transaction should be smooth and seamless.