Despite the overall consequences of the Covid-19 epidemic on the economy, the industrial land/industrial real estate industry is still on the rise. Given the present market condition, the industrial zone’s land leasing cost has soared and has become a bright point. Other categories, such as commercial housing, offices, and retail, have a scarcity of supply. One reason for this is that cash-strapped businesses are seeking capital to help them survive. There is increased interest in the sale and leaseback financial structure since it may improve cash flow and play an important role in the strategic expansion.
What Exactly is a Sale-Leaseback?
Sale and lease back is a type of financial instrument in which one party (the seller/future lessee) holds an asset and sells it to a second party (the investor/future lessor). The seller then leases the asset back from the buyer, making the seller the tenant and the investor the landlord. The seller benefits from being able to obtain finance without having to relocate or disrupt business operations. Moreover, they are selling the item at the current market price, which is likely to be greater than the original acquisition price.
The investor benefits from the acquisition of an operational asset that generates an immediate return on investment or Business equipment financing in the form of monthly rental payments. As a result, they don’t have to spend money on leasing or marketing activities to find new renters.
Different Types of Sales-Leaseback
In the sector, there are 2 kinds of selling and leaseback transactions: capital leases and operational leases. What is an operating lease, you ask? A selling and leaseback contract is typically structured as an operational lease, although in other situations it is handled as a capital lease. A sale and leaseback are often classified as a capital lease if the lease has a buyback clause or a buyback agreement available at a discounted price, or the lease value exceeds 90% of the property’s worth.
By shifting part or all of the risk of operating expenditures to the tenant, the landlord obtains the seeming advantage of some protection against operating cost increases. In general, four separate kinds of leases characterize the various techniques of controlling operational expenditures, which are as follows:
Percentage Lease: This is calculated based on the lessee’s gross or net income. Minimum rent is required under a percentage lease to cover the lessor in the case of a tenant’s closure.
Hybrid Lease: The occupier and owner split the cost of building operations in a hybrid lease, which includes both gross and net rentals.
Net Lease: Depending on whether the contract is a single net lease, a double net lease, or a triple net lease, the occupier is liable for the rent and operating costs.
Gross Lease: The tenant pays rent and the lessor pays all living expenses. If the contract demands it, the occupant can pay for unusual repairs.
What Methods are Available for Obtaining a Sale-Leaseback?
Businesses that employ sale-leasebacks typically have high-cost fixed assets, such as real estate or expensive machinery (Aviation Finance). Because the property is the ultimate high-cost fixed asset, real estate corporations choose sale-leaseback financing. However, sale-leaseback is used by firms in a variety of different industries, including construction, logistics, engineering, and agriculture. Heavy equipment is used by large vehicles, and another registered rolling stock is frequently used. Collections of little things, no matter how large they are, are unlikely to satisfy.
How Does it Work?
Following the purchase of an asset, an investor enters into a lease agreement with the seller in which they rent the property back at an agreed-upon rate. The typical lease period for sale-leasebacks is from 5 to 10 years, allowing the investor adequate time to realize their investment yield. Investment returns for these deals in Vietnam might vary between 8 and 11 percent.
Sale-leaseback transactions are two transactions in one: the first is the sale or purchase of the asset, and the second is the leaseback. To complete the transaction, both parties must sign a Sale-Purchase Agreement (SPA) and a Lease Contract. The SPA and Lease Contract are inextricably linked because the selling price listed in the SPA must enable the investor to generate an acceptable yield when compared to the monthly rental rates specified in the Lease Contract.
Who Should Engage in a Sale-Leaseback Transaction?
A sale-leaseback is a potential alternative for companies looking for targeted re-financing possibilities like Medical equipment leasing to free up money and enhance cash flow without disrupting operations. Interested occupants should contact a reputable real estate firm. A competent agency may assist them in determining the worth of their land and building asset(s) and proposing a monthly rental charge to achieve a good ROI for the new owner/investor. Furthermore, the agent will work with both parties to get attractive lease conditions that are consistent with current market practice.
Companies primarily interested in sale-leaseback transactions often include ‘blue chip’ manufacturers and multinational occupiers, industrial developers and landlords, institutional investors, private funds, and foreign investors.