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Sale Leaseback - Retailers Raise Capital through Existing Assets
With the ever increasing competitive climate, every retailer needs to
focus on growth in order to compete long term. At the same time,
economic conditions are forcing companies of all sizes to reduce
expenses and keep a watchful eye on the bottom line. Therefore,
retailers need to look for creative ways to fund future growth without
compromising their bottom line results. The sale leaseback is one way to
achieve this goal effectively.
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A sale lease back is when a company
sells off a property it owns, and is occupying, and immediately
leases it back. The sale leaseback allows the company to raise funds
through their existing property assets to fund their growth. The
savings they realize in a sale leaseback on interest costs and
depreciation costs helps their overall balance sheets while giving
them working capital that can be better spent elsewhere in their
overall growth strategy.
Real estate ranks as high as second in most companies overhead
costs. A sale leaseback is a great vehicle to get this expense back
in line to a more manageable level. A company needn't worry about
losing control of their property after the sale either. Most sale
leasebacks contain 15-25 year terms with an option for an additional
15-25 years. With most properties useful lifespan maxing out around
50 years, the lease arrangement cover the entire span a retailer
expects to occupy the property. When their sale
lease back finally does expire, they have a much more attractive
exit strategy in simply picking up and leaving then if they had the
burden of actually owning a property that is no longer viable for
them. In addition to the lease timeframe, there are many other terms
of a sale leaseback that will allow the tenant full control of the
property. Most sale leasebacks are leased in the form of a triple
net lease. Under a triple net lease the company leasing the property
pays all the property taxes, property insurance, all operational
expenses and all maintenance expenses on the property. In return,
the tenant is able to use the property and develop the property to
suit their ongoing needs. In essence under a sale leaseback the
selling company retains all the advantages and privileges they had
when they owned the property. The only change is they transfer
ownership and pay the new property owner the agreed upon lease
amount. Many times this amount is no greater then the payment being
made on the property under the original purchase finance agreement.
Also no interest charges and depreciation charges need to be
recorded under a lease so the company's debt to equity ratio can be
improved dramatically.
The sale leaseback has proven successful as of late with many major,
well recognized retailers. K-Mart and Wall Mart are both great
examples of major retailers who have raised hundreds of millions in
capital using the sale leaseback. As corporations, especially
publicly traded ones, continue to put more and more pressure on
executives to show a strong balance sheet, coupled with an extremely
competitive retail environment, the sale lease back trend should
only become more popular with retailers as a capital funding tool.......
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