Sale-leaseback transactions enable companies to continue using one of their fixed assets after selling it. These assets are generally in the form of expensive equipment or valuable real estate property. Under these contracts, corporate enterprises transfer the ownership of the fixed asset to reliable buyers. According to the terms of this agreement, the companies can lease the asset from purchasers for a specific period. For this, they have to make certain lease payments to the buyers during this duration. As such, the companies can utilize the fixed asset for conducting their commercial activities without owning it. This helps to improve the companies’ cash flow position in the market without hampering operations.
Sertant Capital – Why do companies enter into sale-leaseback transactions?
Sertant Capital LLC is a popular full-service equipment financing company operating from its headquarters in Irvine, California. This corporate enterprise invests its resources in lucrative third-party domestic and global lease transactions. Moreover, the company also finances all its clients’ equipment projects, including transactions falling under special situations. Its qualified professionals even manage private funds, and others account for their clients in the capital market. The company has been conducting commercial activities in the country’s financial sector since 1905. For the last 100 years, the company has set the benchmark for other similar businesses to follow in the market.
Qualified professionals at Sertant Capital say companies are always looking for ways to raise liquid capital. These corporate enterprises have to take bank loans, mortgages, or resort to mezzanine financing. Unfortunately, the companies end up paying a high rate of interest on their debts. Sales-leaseback transactions offer businesses an alternative avenue to obtain cash for their commercial operations. The companies sell fixed assets like real estate property to the prospective buyer for a profit. Then the businesses enter into a lease agreement with the purchaser to secure a right to use the assets. For this, the companies end up making reasonable lease payments to the new owner.
What should companies consider before entering into sale-leaseback transactions?
When entering into sale-leaseback transactions, companies generally consider the following five factors:
- The sales consideration should correspond to the annual lease payments when evaluating the real estate using the capitalization rate;
- The creditworthiness of the seller-cum-tenant needs to be immaculate to ensure a stable income to the purchaser;
- The lease period should be for a time frame which is acceptable to both the tenant and new owner;
- The terms of the lease should contain a clause for a suitable incremental increase in annual lease payments; and
- The present condition of the asset, its age and location should determine the sales consideration.
Specialists at Sertant Capital sum up by saying that entering into sale-leaseback transactions allows companies to obtain necessary cash. These businesses can use the funds to finance their expansion activities or for their operations of their commercial activities. These corporate enterprises just need to sell their fixed asset to the buyer for a lucrative sales consideration. Then they enter into a lease agreement with the purchase to use the asset for their operations. In doing so, the businesses should have a good credit rating and ensure that the sales price corresponds to the lease payments. Moreover, the lease period should be for an extended period and accept an incremental increase in rents with time.