Leaseback Financing: Working Capital Solutions

Businesses that own real estate can find themselves trapped in an investment that is not producing any cash. When a business is running low on cash flow, it might consider refinancing some of the real estate that it operates in. This can be a great solution, if done correctly. The best way to go about this is to do leaseback financing.

What is Leaseback Financing?

A leaseback is the selling of real estate while entering a long-term agreement to lease that same real estate from the buyer. The business that resides in the building continues to pay all utility bills and is responsible for the maintenance of the building. There are several benefits to this type of financing arrangement.

What are the Benefits of a Leaseback? 

First, the business that sells the real estate in the leaseback agreement now has access to cash which increases its cash flow. When the property is sold in these financing arrangements, it is sold for full market value, whereas traditional financing will only loan out 60-70% of the building’s value.

Another benefit is that there is no disruption to the business. Because the company is leasing the same building that it sold, it does not have expenses in relocating nor does it lose production time while transferring to a new location.

Additionally, there are tax benefits to participating in leaseback financing. When leasing a building, the entire lease payment is tax deductible. However, when a building is owned and the mortgage is being paid, only the interest expense and depreciation can be written off.

While the former owner of the building is now the tenant of the building, there is still a form of ownership and control of the real estate. The tenant is still responsible for the maintenance, taxes and insurance of the property. If expansions or other improvements are desired, amendments to the lease can be made and funding can be provided.

Lastly, since a leaseback is technically not a financing instrument, there are few to none covenants on the company. Again, this gives the company more freedom and control over its business than traditional financing would offer.

Why Choose a Leaseback?

If the business is in need of cash and has capital in the form of real estate, leaseback financing is a great business solution. It provides the cash the business needs without the disruption and expense of relocating. Other incentives, such as tax benefits, can make a leaseback a desirable solution for many struggling businesses.

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