Advantages and disadvantages of leaseback

COVID continues to cause almost every business to reappraise its operating strategy to try and protect itself. Some of you may look for government backed loans (CBILS or BBLS), but what if you want to avoid the initial low rate loans that come with the nasty ‘APR’? What are the alternatives?

Leaseback: What is it, and how does it work?

If your business owns its premises it’s likely you can enter into a ‘leaseback’ arrangement. This enables the business to sell its premises (normally for more than the loan to value a bank will lend you) and remain in occupation on a commercial tenancy (term of 10-15 years, but it can be longer on a triple net lease – ie taxes, maintenance and insurance are the tenants responsibility).

Leaseback releases ‘non performing’ equity in the property and offers an alternative to mainstream commercial lending options. It removes existing debt from the balance sheet and makes the business more attractive to investors. Lease payments are also tax deductible and enables reinvestment into goods, services, technology and most importantly, your people.

There are any number ways leaseback can be structured. It could include a ‘buy back’ option at some point within the tenancy or at its end. Or, a rent ‘delay’ (the first one/two years rent are held back from purchase price). This allows the business to concentrate on the operational side rather than worry about rent.

Sounds good, but are there any disadvantages?

Yes, of course. It removes the possibility of future appreciation in the building’s value. There’s no guarantee the investor will extend the lease at the end. No future asset leverage for lending and then there’s the potential for Capital Gains (Speak to your relationship partner at Gerald Edelman about CGT).

Which type of businesses choose Leaseback?

As a direct result of COVID some major operators have entered into ‘leaseback’ agreements over the past few months. Businesses like ‘Matalan (released £29 million), Next (over £100 million realised) and even Maclaren F1’ (expected nearly £270 million) and no surprise, its growing by the day.

Leaseback is a more cost effective option then commercial lending but it’s not for all businesses. It depends on the overall value of the premises, the industry the business operates in and the ‘covenant’ (strength) that the business offers as an occupying tenant. (CAUTION: As you can imagine even previously strong industries are now under more scrutiny due to their business model and the resulting effects of COVID) and they are likely to struggle to realise anywhere near full value).

To discuss whether leaseback is the right choice for your business, contact John Caulfield, CEO of Salease on info@salease.co.uk or 020 8004 7115. Salease is a business premises specialist dealing with all types of Commercial Property across all industry sectors and assets classes, throughout the UK.