Market Insight

Raising Funds via Sale and Leaseback (the alternative to a finance package)

April 30, 2020

Owner occupiers have one significant advantage over leaseholders when it comes to the requirement to raise significant sums of cash relatively quickly – the property they occupy.

Many companies require cash at various points in their lifecycle whether it is to raise finance for support in difficult periods, reduce debt, support balance sheets and, in improving markets, expand. 

One simple method of doing this for an owner occupier is a sale and leaseback. In this article, we discuss the positives and negatives of undertaking this type of transaction.

A sale and leaseback is the sale of a property that is owned and occupied by an entity which, on completion of the sale contract, enters into a lease agreement with the buyer. 

The buyer becomes a landlord whilst the owner occupier becomes a tenant. From this point forward, the tenant is expected to pay a rent for a term in accordance with their lease as well as abide by other stipulations such as repairing obligations, rent reviews and assignment provisions amongst others.

This type of transaction is well known to the market and Vail Williams has a long track record in this area of property expertise. 

We also have a long list of willing investors looking to commit funds to sale and leaseback acquisitions and they come from all sorts of backgrounds – whether they be high net worth individuals, family trusts, property companies, Local Authorities or institutional funds. 

Indeed, the owner’s pension fund could also qualify as a potential purchaser, which is another route that may be worth considering as it retains an element of proprietary control of the asset whilst realising value. 

More so, when the UK economy is fragile, investors are willing to pay enhanced values for sale and leaseback investments – it’s a little like buying gold in recessionary times – particularly if the tenant possesses a strong credit rating and / or takes a long lease. 

The benefit to the owner occupier, during the term of the lease, is that they can continue to occupy the building, maintain control of the premises and avoid business interruption, allowing the business to continue whilst at the same time receive a cash sum which can be invested as required. 

Often (although not always), a let property is more valuable than a vacant property (VP) meaning a sale and leaseback could potentially make more for an owner than could be achieved by a VP sale alone. 

There may also be some tax advantages to consider and we recommend seeking appropriate tax advice on this – we would be happy to point you in the right direction. 

By following this path and not pursuing finance options, one obvious advantage is that the owner occupier is not tied into what could be onerous debt conditions and interest payments. 

This is particularly prevalent in falling economic markets where loan to value percentage may push a borrower into breaching their debt package conditions.Meanwhile, there are also some potential disadvantages to consider. 

Firstly, the tenant will have to pay rent, albeit you will have received a capital sum, and this will need to be affordable on a monthly or quarterly in advance basis for the company. 

Secondly, don’t forget, you will need to abide by the lease terms. You will be liable for the terms you negotiate during the sale process – even if they don’t suit you at a later date. You can sometimes incorporate flexibility, such as break clauses, but this often means risk to a purchaser and any savvy party will price this in. 

Finally, you will lose the long term appreciation in the value of the property. However, if an entity is looking to raise funds whilst not looking to acquire debt, which could be unavailable in the current climate, then a sale and leaseback offers a great way to achieve a short term cash injection. 

Vail Williams are experts in this field and would be happy to steer you through this complicated issue. For more information, don’t hesitate to contact us.