Sale Leasebacks & Synthetic Leases

Quick Takeaways

Sale-Leasebacks are transactions in which an owner sells a property and then leases it back from the new owner.
Often businesses will use sale-leasebacks to bring liquidity back into their business finances.
Sale-leasebacks can be found in many commercial transactions, specifically in the hospitality, retail, and healthcare industries.

Source: What is a Sale-Leaseback Transcation? (Motley Fool, Nov. 17, 2023)

A sale-leaseback transaction in real estate involves the owner of a property selling it to an investor or a company and then leasing it back from the buyer. This arrangement allows the original owner to free up capital that is tied up in the property while still retaining the use and operational control of the space. It provides immediate liquidity and can improve the seller's balance sheet by converting an illiquid asset into cash, which can be used for various business purposes such as expansion, debt reduction, or investment in core operations. Sale-leaseback transactions are particularly popular in commercial real estate, including sectors like retail, industrial, and office spaces.

A synthetic lease in real estate is a financing arrangement that allows a company to lease property without having to recognize the lease liability on its balance sheet, thus keeping the debt-to-equity ratio lower. Essentially, it is structured to be treated as an operating lease for accounting purposes but as a financing lease for tax purposes. This means the company can benefit from off-balance-sheet financing while still enjoying the tax benefits of ownership, such as depreciation deductions. Synthetic leases are often used by companies looking to optimize their financial statements and maintain a more favorable credit profile, making them attractive for acquiring high-value assets like commercial real estate without significantly impacting financial ratios.

See References for more information.

References

NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require a password.

About Sale-Leasebacks & Synthetic Leases

Synthetic Lease (Lark Suite, Jun. 25, 2024)

A synthetic lease is a financial arrangement where a company leases a property from a special purpose entity (SPE) it creates solely for that purpose. The lessee, or the company using the property, typically has control and use of the property for an extended period, often comparable to ownership. However, from an accounting perspective, the lessee treats the lease as an operating lease rather than a capital lease, keeping the property off its balance sheet.

'Sale-Leasebacks' Offer to Help Homeowners Needing Cash. Some Lose Thousands (NPR, Jun. 18, 2024)

As home prices nationwide have gone up dramatically since the start of the pandemic, the amount of equity that people have in their homes is rising, and many homeowners want to access that increased value. But for people with bad credit or low incomes, loans are often inaccessible. EasyKnock, as well as other companies with similar products, offer sale-leaseback deals as an alternative that doesn't have to follow the regulations that apply to lenders.

What is a Sale-Leaseback Transaction? (Motley Fool, Nov. 7, 2024)

“A sale-and-leaseback, also known as a sale-leaseback or simply a leaseback, is a financial transaction where an owner of an asset sells it and then leases it back from the new owner. In real estate, a leaseback allows the owner-occupant of a property to sell it to an investor-landlord while continuing to occupy the property. The seller then becomes a lessee of the property while the purchaser becomes the lessor.”

What if Your Sellers Have Nowhere to Go? (REALTOR® Magazine Media, Aug. 9, 2021)

“For sellers, it’s more difficult than ever to get the timing right between the sale of their current home and the purchase of their next property. Low inventory, high prices, and quick transactions work against them as buyers, so many sellers may need extra time to figure out their next move. One solution is to ask for a leaseback agreement, which allows the seller to stay put and rent the property from the buyer after the sale. Such an agreement is typically meant for a short period of time—a matter of days or a week. But in this feverish market, some agreements are stretching to a few weeks or even months, which can pose problems if they’re not structured to account for various risks, says Deanne Rymarowicz, associate counsel at the National Association of REALTORS®.”

Advantages of Sale-Leasebacks

Total Guide to Sale Leasebacks in Real Estate + The Pros & Cons (ButterflyMX, Nov. 19, 2024)

The main purpose of a leaseback agreement is to achieve cash flow.
Cash flow in real estate is the movement of money in and out of your property. It measures the income of your property and the money you spend maintaining your property.

For instance, if your commercial company needs immediate capital, a sale leaseback transaction can be a quick way to deliver. Many companies use the incoming capital to start a new project, finalize a partnership, or bail themselves out of a difficult financial situation.

Sale-Leaseback: Unlock Equity Tied Up in Real Estate (Fifth Third, Apr. 1, 2024)

"In a lot of cases, companies may not realize that they have too much money tied up in an underperforming asset," said PJ Camp, Managing Director and Head of Real Estate Investment Banking at Fifth Third. "Sale-leasebacks allow companies to take that equity out of the real estate and invest it elsewhere where they can generate a higher return."

Synthetic Leases and Commercial Real Estate

Financial Footnotes: Reading the Fine Print (Investopedia, Nov. 5, 2024)

A synthetic lease is an operating lease in which a parent company's special purpose entity purchases an asset and leases it back to the parent company. The asset might be equipment or real estate. The parent company can purchase the asset at the end of the lease term, negotiate a renewal of the lease, or relinquish the asset under specific, typically preset terms.

Real Estate That Drives Competitive Advantage (CBRE, Mar. 6, 2024)

Credit tenant leases (CTLs) and synthetic leases are two creative ways to get capital projects funded while optimizing the balance sheet and preserving cash flow. Both structures also allow for long-term control of the asset.

Synthetic leases: A Creative Accounting Technique Explored (Faster Capital, Jun. 13, 2024)

What is a synthetic lease? A synthetic lease is a financing arrangement that allows a company to use a property without actually owning it. The company typically leases the property from a special purpose entity (SPE) that is created solely for the purpose of owning the property.
How does a synthetic lease work? Under a synthetic lease, the SPE owns the property and leases it to the company for a fixed term, generally between 10 and 20 years. During this time, the company is responsible for all maintenance and operating expenses, as well as the property tax and insurance. At the end of the lease term, the company has the option to purchase the property at a predetermined price.

Articles, Surveys & More From NAR

Find all of NAR's Commercial Real Estate Research here

Find an index to all NAR Research here

Commercial Real Estate Market Insights (National Association of REALTORS®)

Commercial Real Estate Market Trends and Outlook (National Association of REALTORS®)

The Commercial Real Estate Outlook is NAR's flagship commercial research publication. It is produced quarterly and includes the latest market information on five major commercial real estate sectors — industrial, office, multi-family, retail and hospitality real estate.

eBooks & Other Resources

eBooks.realtor.org

The following eBooks and digital audiobooks are available to NAR members:

The Art of Commercial Real Estate Leasing (Audiobook, eBook)

Complete Book of Real Estate Leases (eBook)

Investing in Real Estate with Lease Options and "Subject-to" Deals (eBook)

The Leasing Process: Landlord and Tenant Perspectives (eBook)

Leasing Administration Simplified (eBook)

Negotiate the Best Lease for Your Business (eBook)

Negotiating Commercial Leases & Renewals For Dummies (eBook)

Books, Videos, Research Reports & More

As a member benefit, the following resources and more are available for loan through the NAR Library. Items will be mailed directly to you or made available for pickup at the REALTOR® Building in Chicago.

Real Estate Investors Deskbook (Boston, MA: West Group, 2011) HG 4521 Ar6Re

Commercial Lease Law Answer Book (New York, NY: Vendome Group, 2008) KF 593 C6

Managing and Leasing Commercial Properties (New York, NY: Wiley, 2007) HD 1394 AL2ma

Real Estate Sale/Leaseback: A Review of the Advantages and Disadvantages (Washington, D.C.: Society of Office and Industrial REALTORS®, 1993) HD 1384 So1

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