Unlocking Capital for Growth: Why CFOs are Leveraging Sale-Leasebacks

If you are considering a Sale – Leaseback on your commercial building, contact Stirling Capital Group today.  Stirling can assist you with finding the right buyer.  We have access to CRE investors specializing in purchasing commercial real estate for SLB transactions.

In the world of finance and corporate real estate, sale-leasebacks are fast becoming a go-to strategy for CFOs who aim to bolster cash flow and working capital. This increasingly popular financial tool allows businesses to free up otherwise illiquid capital tied up in their real estate assets. By doing so, they can fuel their growth, enhance credit ratings, and unlock financial flexibility for future expansion.

Understanding Sale-Leasebacks

A sale-leaseback is a financial transaction wherein a company sells its real estate property to an investor and simultaneously enters into a long-term lease agreement with the new owner. This transaction offers a dual advantage to businesses: they can continue to utilize the property while also monetizing it to boost their cash flow.

The process of a sale-leaseback can be summarized in the following steps:

  1. The company identifies its real estate asset(s) suitable for a sale-leaseback.
  2. It then sells these assets to an investor or a Real Estate Investment Trust (REIT).
  3. Following the sale, the company leases back the property from the new owner.
  4. The lease period is typically long-term, and the company continues to use the property as before.
  5. The proceeds from the sale are then used to bolster the company’s balance sheet or fund its growth initiatives.

The Role of CFOs in Sale-Leasebacks

As financial stewards, CFOs play a pivotal role in navigating sale-leaseback transactions. They are responsible for ensuring that the terms of the sale and the leaseback align with the company’s financial goals and operational needs. The CFO’s role in a sale-leaseback deal typically involves:

  1. Identifying the real estate assets that can be monetized through a sale-leaseback.
  2. Negotiating the terms of the sale and leaseback to ensure they meet the company’s financial objectives.
  3. Coordinating with real estate brokers, legal advisors, and other stakeholders to execute the transaction. It’s important to make sure the transaction is structured as a true sale, and not a “financing “transaction.  An option to repurchase the property at the end of the lease my trigger a question to if it’s truly mortgage financing.
  4. Allocating the proceeds from the sale to strategic initiatives, such as debt repayment, capital expenditure, or other growth opportunities.

Cash Flow Advantages of Sale-Leasebacks

One of the main reasons why CFOs are increasingly leveraging sale-leasebacks is the cash flow advantage they offer. Here are some ways in which sale-leasebacks can enhance a company’s cash flow:

Immediate Access to Capital

Sale-leasebacks unlock the equity tied up in real estate assets and provide businesses with immediate access to capital. This infusion of capital can be used to fund growth initiatives, pay off existing debt, or improve the company’s balance sheet health.

Bolstering Working Capital

By transforming a non-earning asset into growth capital, sale-leasebacks can significantly bolster a company’s working capital. This extra capital can offer companies the financial flexibility to seize growth opportunities as they arise, setting them apart from their competitors.

Predictable Cash Outflows

The long-term lease agreement in a sale-leaseback transaction provides companies with predictable cash outflows in the form of lease payments. This predictability can aid in cash flow management and financial planning.

Strategic Uses of Sale-Leaseback Capital

The proceeds from a sale-leaseback can be strategically deployed in various ways to enhance a company’s financial position and fuel its growth. Here are some ways CFOs use sale-leaseback capital:

Debt Repayment

Companies can use the proceeds from a sale-leaseback to pay down existing debt and improve their credit ratings. Lower debt levels can enhance a company’s financial health and make it more attractive to investors and lenders.  Also, paying down the more expensive debt on their balance sheet makes for a healthier balance sheet.  Many transactions are credit positive and help to de-lever the balance sheet.  In addition, the SLB can have a positive effect on WACC.  When the post transaction cap rate helps to lower the WACC, it compares favorably to other capital alternatives.

Investing in High ROI Segments

Sale-leaseback capital can be reinvested in high return on investment (ROI) business segments. By doing so, companies can boost their returns and improve their operational efficiency.  The ultimate effect of the SLB is a gradual increase in EBITA for the company.

Mergers and Acquisitions

Sale-leaseback proceeds can also be used to finance mergers and acquisitions (M&A). This alternative financing method can give companies an edge in a highly competitive M&A market.  As discussed above, re deploying

Capital Expenditures

Companies can use the sale-leaseback capital to fund capital expenditures, such as the purchase of new equipment or technology upgrades. This can enhance their operational efficiency and drive business growth.

Conclusion

In today’s challenging economic landscape, CFOs are exploring innovative ways to enhance cash flow and fuel business growth. Sale-leasebacks have emerged as a viable strategy, providing businesses with immediate access to capital, bolstering their working capital, and offering financial flexibility for future growth. By strategically leveraging sale-leasebacks, CFOs can unlock the value in their real estate assets and steer their companies towards financial success.