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Last Updated: Feb 18th, 2008 - 14:39:01 |
Use your real estate to raise cash
An increasing number of small businesses are turning to the real estate sale/leaseback as a creative source of new financing. With real estate prices pushing through the roof these days, most people -- including businessmen -- would rather own an appreciating asset than let some landlord reap the gains.
But for a growing business, ownership of real estate, a non-current asset, often obscures potentially current liquid assets that can be put to work more effectively. Many expanding business seeking to stabilize their balance sheets against the vagaries of loan rates, or entering the market for more money, might look first to their own fixed holdings.
By selling property for cash and simultaneously renting it back from the buyer through a long-term net lease, a business may be spared the perils of borrowing and the headaches of a stock flotation -- and gain capital advantages, too.
Indeed, through tax benefits to the buyer and cash flow improvement to the seller, a well-executed sale/leaseback deal can turn out to be one of those rate arrangements in commerce that result in measurable profits for both parties. Here's how:
Suppose a business has owned its factory or headquarters for 20 years. The depreciated property is carried on the books at a residual value of 20% of the purchase price, even though its true market value may have risen dramatically. As such, it is clearly a wasted asset that does not even enhance the balance sheet.
If the building is sold outright, the company will have to pay capital gains taxes on the profit. If the original cost was, say, $120,000, the property would be carried at perhaps $20,000 for the land (which can't be depreciated) and $20,000 residual value for the structure.
The company will have written down $80,000 in depreciation. Let's assume the property is sold for $400,000, generating a $360,000 capital gain. If the effective corporate tax rate is 30%, $108,000 is paid in taxes, leaving $292,000 to plow back into the business, in contrast with a bank refinancing that would generate $320,000.
In terms of working capital, the business is initially $28,000 better off via the mortgage route.
One of the cornerstones of the agreement is the fact that a buyer is often willing to accept an annual rent that will cost the company less than annual interest on a loan. The buyer can do so since total return -- profit on the continuing appreciation of the property and tax advantages that accrue to new ownership, as well as rental income -- will make the package attractive. As a result, the sale/leaseback can effectively provide capital at rates that are 1-1/2 to 2-1/2 points under conventional debt rates.
The buyer might accept a lease, therefore, at $40,000 a year for 10 years, where orthodox financing might cost $48,000. The lessee takes the rent off gross profit as a business expense.
Experts agree that the sale/leaseback tactic, long popular in Europe where ownership is not the sanctified institution it is here, is becoming part of real estate's "new wave" of alternate financing.
Since the lessee of the leased-back premises enjoys the perquisites of ownership -- he can add to or otherwise alter the property as needed, retaining total control -- in a sense he still "owns" it. If you have the rights to use it, then it's really yours. And to clients who stubbornly insist that their company facilities are profitable assets, they retort, "Then sell your business and go into real estate.
USA Real Estate Listings:
http://search.ezilon.com/united_states/business/real_estate/index.shtml
Europe Real Estate Listings:
http://www.ezilon.com/cgi-bin/estate/realestate.cgi
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