Sale & Lease Back as a financing alternative

What is a Sale & Lease Back Financing?

Sale & Lease Back is an alternative to traditional bank financing (investment loans, real estate loans). The entrepreneur sells an asset owned by the company, such as a machine or real estate, to a leasing company. This can be either an existing fixed asset or a new investment. After the sale, the enterprise leases the asset back for a fixed rental period and pays a fixed regular rent. The proceeds of the sale increase liquidity for the company which can be used for the general corporate purposes such as working capital, capex, R&D and acquisitions.

Why should sale & lease back financing be considered?

  • Especially with real estate, a higher loan to value “LTV” and longer maturities can be achieved than with classic mortgage-based financings
  • Liquidity is generated through the realization of hidden reserves (value increases)
  • Tied up capital in non-operational assets are being released and the company can focus on its core business

Especially in real estate assets of a company, large hidden reserves regularly can be found. But also, in the area of fixed assets, one very often finds assets that have been depreciated to the greatest possible extent e.g. for tax purposes and whose actual useful life and thus also current value is considerably higher. A Sale and Lease Back frees up these hidden reserves for the company and increases the financial freedom through the inflowing liquidity. In the case of operational real estate, the amortization period of a real estate investment is also considerably longer than for operational investments that directly serve the production process. The resulting long-term capital commitment reduces the financial headroom for investments such as machinery, IT or research and development.

For an entrepreneur seeking to maximize returns investments in real estate are less attractive than for dedicated real estate investors. For the latter, the focus is on maintaining the substance of their investment while at the same time keeping the valuation risk low, accordingly the expected return is comparatively low. In contrast, the entrepreneur focuses fully on the operational business. By means of a sale & lease back of, for example, company real estate, he can align his financing strategy accordingly.

What are the advantages of Sale & Lease Back financing?

  1. Financing of the full investment amount

In the case of classic bank loans, it is usually expected that the investment will be partially financed by the company’s own funds. Banks value the asset based on “loan-to-value” calculations and thus only finance between approx. 60-80% of the acquisition costs. With a sale and leaseback, on the other hand, 100% of the investment costs are usually borne by the lessor.

  1. Continued access to the sold asset

Even after the asset has been sold, the company retains the full value in use through the simultaneous signing of a lease agreement, i.e. the company continues to have full access to the asset sold.

  1. Flexible conditions of the leasing contract

Both the term of the leasing contract and the retransfer of the asset at the end of the leasing period can be agreed individually. In the case of real estate, for example, expansion investments in the property as well as subleases can also be arranged together with the Lessor.

  1. Matching maturities

When an investment is financed by means of classic bank loans, the credit period and the useful life of the asset usually diverge. As a result, the loan is regularly repaid long before the actual end of the asset’s useful life, i.e. the redemption payments on the loan exceed the depreciation. In a sale and leaseback, on the other hand, the financing payments (repayment component) and imputed costs (depreciation based on the useful life of the asset) are balancing if the leasing period is chosen accordingly.

  1. No financial covenants

In contrast to traditional bank loans, a sale & lease back does not contain any financial covenants that have to be observed. The lessor obtains ownership rights by purchasing the leased asset and is the lessor through the leasing contract, but not a lender.

When is sale & lease back financing an option for your company?

  • Long-term financing alternative for fixed asset investments
  • Supplementing the financing mix
  • Exhausted debt capacity with relationship banks
  • Urgent need for liquidity
  • In the run-up to a sale of the company

While classic financiers such as banks, savings banks and other traditional lenders base their credit assessment on the overall financial situation of the company, leasing companies focus on the value of the asset. This enables them to offer attractive financing for companies with investment grade ratings as well as for borrowers with lower ratings.

Especially in times when the debt capacity of a company does not allow for any additional bank loans, sale & lease back solutions are often the only source of liquidity. Since lessors have in-depth knowledge of the value of the leased assets, they can make timely decisions and thus make liquidity available on short notice.

If the entrepreneur plans to sell his company, the prior sale of business property or other long-term fixed asset items can increase the value of the company. See also our Insights on this topic https://capitalmind.com/unlock-value-of-company-real-estate/

Which asset positions are suitable for a sale & lease back?

Traditional assets for a Sale & Lease Back are machinery and real estate. However, other long-lived assets such as patents & licenses, IT (hardware & software) or possibly also stock items are also proven attractive to leasing companies.

Like to learn more? Please feel free to contact us.

Thorsten Gladiator
Thorsten Gladiator
Partner
Germany
Ervin Schellenberg
Ervin Schellenberg
Managing Partner
Germany
Bart Jonkman
Bart Jonkman
Managing Partner
Benelux
Stig Madsen Lachenmeier
Stig Madsen Lachenmeier
Managing Partner
Nordics
Kilian de Gourcuff
Kilian de Gourcuff
Partner
France

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