What is Sales and Leaseback?

In short this is a sales of an interest in property (freehold or leasehols) and lease back to the seller. This is a easy way and can be considered as best tools to generate capital from Real Estate. This is an effective tool to remain the intention of the seller on what he / she is going to do.

Sales and leaseback is also used by the the corporate or developer mostly in commercial property. The commercial property will be sold at fair market value and leased back. This is important for teh corporate to retain the control of the property.

What are the benefits of sales & leaseback?

• Income guranteed.
• Free-up capital for re-investment.
• Improve the balance sheet.
• Receive 100% of Open market value.
• Low payments with long terms (up to 30 yrs or more.).

How do you start?

• Firstly determine the Open Market Value of the property
• Then you will need to ensure the existing or potential cash flow/opportunity cost in the said property.
• Then you determine the Yield that you will be provided
• You will then need to structure the "deal" i.e. Vendor"s Obligations, Purchaser"s Obligations and in some cases, a third party "Lessee"s Obligations".
• The next is of course to package the whole thing together and commence the marketing of the product.

Issues to look out for in a Sale and Leaseback scheme include:

1. Term of Tenancy. The longer the better, but the norm is usually 3+3
2. Date of Commencement of Tenancy, especially if you have bought an off the plan development. Ensure that the date is confirmed
3. Rental Amount. It will usually be a percentage of the Purchase Price or in some cases will also include a profit sharing ratio. 6%-8% on both gross and nett levels are acceptable. While the profit sharing ratio will be 65% to the owner and 35% to the Seller/Nominee. Ensure the operating expenses are captured or excluded. 
4. When the Rentals are Paid. For cashflow reasons, please check this clause carefully. Payment mode will differ from Quarterly, Half Yearly or even Yearly in advance
5. Furnishing (if applicable). In most serviced apartments or hotel, furnishing is a requirement. Ensure if it is part of the purchase price or is separate and also ensure that the furnishing is the same for the whole development. This would make sure that there are no preference units.
6. Sinking Fund. Look out for the establishment of the sinking fund for the Building. Very important especially is sale on Strata. In event the sale includes the Furniture, ensure the Seller/Operator also provides a sinking fund for your furniture.