Disadvantages of sale leaseback?

December 10, 2024

by a searcher from Colorado State University in Fairfield, CT, USA

I'm looking at a business with real estate, and considering a sale leaseback to help finance the deal. I understand the advantages which I believe is primarily: capital to fund the deal which results in lower SBA debt payments which frees up cashflow for the business. What are the disadvantages or reasons to avoid a sale leaseback to finance a portion of a business acquisition?

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Reply by a searcher
from Emory University in Tucson, AZ, USA

We've evaluated two opportunities involving real estate and our considerations: Will business growth or future needs require relocation? Is there something unique about the property's buildout - food processing, heavy electrical/industrial, temp control, crazy expensive equipment to relocate, regulatory burden if relocated, etc. - that would be expensive to replicate if a move is required (think growth, failure to renew a lease, etc.). Would the property support market rate leasing if not occupied by the business? Is an exit a 5 or 10+ year horizon?

There can be many benefits in owning the property when warranted by the business as you can gain property appreciation, gain tax benefits of having an affiliated entity holding the property, have more control (especially if the buildout is expensive/unique), etc. If the property has a higher valuation than the business, there can also be SBA financing benefits (and banks love financing property).

Through a referral, we worked with a commercial broker/investor/general contractor in evaluating the real estate, which added more confidence to our decision-making process.

Reply by an intermediary
from California State University, Northridge in Los Angeles, CA, USA

Disadvantages can range from putting a strain on the business financially if you structure too high of a rent to loss of future appreciation. Those can be mitigated by structuring a fair market (or even below market) rent and by putting the capital to a higher and better use as opposed to sitting idle in the real estate and relying on appreciation. Not that you would, but you could hypothetically execute an SLB and buy an investment property if you wanted future appreciation / real estate tax benefits. There are other disadvantages but also many advantages (only if it's the right situation). DMs open, always happy to help and chat further. My email is redacted as well

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