As an entrepreneur, you know that it is not just the presence of assets that makes a difference to the success of your business. The key is making sure you utilize them effectively. Unfortunately, business owners aren\u2019t always fully aware of how they can best leverage their commercial property\u2019s value. It is not simply an item you have to allow to appreciate over the years and then sell.\n\n\n\nIndeed, in many cases, this isn\u2019t the most practical outcome. Sure, selling your property outright can release a significant amount of liquid capital for reinvestment. But then you\u2019re left without a space from which to run your business. Really, this approach is only appropriate if you\u2019re selling your company entirely or moving to a different location. An alternative option available to you, on the other hand, allows you to liquidate this asset while still being able to operate from it.\n\n\n\nLet\u2019s take a closer look at the concept of sale-leaseback. What does it involve and what do you need to know about it?\n\n\n\nWhat is Sale-Leaseback?\n\n\n\nA sale-leaseback is the process of selling a property to a buyer on the condition that you can continue occupying the property under a lease agreement. \n\n\n\nIt\u2019s a relatively straightforward arrangement that holds benefits for everyone involved in the transaction. In most cases, this is an approach sought by business owners that need to liquidate some assets while still operating from the same location. From the buyer\u2019s side, this arrangement is usually sought by investors that want to see immediate returns by minimizing the time and expense devoted to seeking tenants.\n\n\n\nIn the majority of cases, the sale and the lease are two separate processes. The requirement to lease the property back to the original owner is not part of the contract of sale. Technically speaking, if the buyer received a more lucrative offer from a third party between the time of sale and the lease arrangement, they could certainly choose to go with them. However, this is a relatively rare situation, and it\u2019s usually in the best interests of the buyer to lease the property to a business that is already fully installed in the property and receiving revenue from a solid consumer base.\n\n\n\nThere are circumstances in which you as the property-owning business don\u2019t necessarily need to sell your entire property. You may be able to retain the building and sell-leaseback adjacent land or buildings that you use for storage, parking, or warehousing. The extent of the sale can be subject to negotiations, particularly if you\u2019re working with a property investor that specializes in a sale-leaseback portfolio.\n\n\n\nWhat are the Advantages?\n\n\n\nAs the current owner of the property, there are various benefits you can enjoy from adopting a sale-leaseback approach. \n\n\n\nThese include:\n\n\n\n\nAccess to liquid capital\n\n\n\n\nPerhaps the most important benefit of sale-leaseback in commercial real estate is that it can free up your liquid capital. You can then apply this to new projects, expanding your business, and investing in staff or equipment that can give you the competitive edge. It can also reduce your reliance on external investors or funding providers who would otherwise require a percentage of profits or may influence your business in exchange for capital. In essence, it can help you to maintain not just your liquidity but also your independence.\n\n\n\n\nReduction of debts\n\n\n\n\nFew businesses own their properties outright. Particularly if you\u2019re a small business owner, you\u2019re more likely to have some form of mortgage on the property. In a sale-leaseback situation, you can benefit from a portion of extra capital while also paying off a significant debt that\u2019s attached to your business. This in turn can shift the value of your company by changing your asset to debt ratio. As such, you may find a knock-on effect if you\u2019re seeking to gain external investment.\n\n\n\n\nMaintaining occupation\n\n\n\n\nYou\u2019ve likely put a lot of time and effort into building your business. Much of this will be located around the property you currently own. This could be in establishing solid relationships with local customers if you\u2019re a retailer. It may be in the form of establishing a highly efficient layout and workflow if you own a warehouse. A sale-leaseback situation means you aren\u2019t undoing the significant investment you\u2019ve put into optimizing your business\u2019 location. You still get to occupy the property for an agreed period of time.\n\n\n\n\nTax benefits\n\n\n\n\nIn some circumstances, your business can gain tax benefits from a sale-leaseback arrangement. On one hand, you have shifted the status from owning the property to renting it. As such, you can usually deduct the cost of your rent from the taxes you pay to the Internal Revenue Service (IRS) each year. In addition, if the property has depreciated in value from the time of your purchase, you will be subject to fewer if any capital gains taxes you have to pay on the sale.\n\n\n\nWhat are the Disadvantages?\n\n\n\nNaturally, alongside the advantages of a sale-leaseback, there are also certain downsides. It\u2019s important to gain a full awareness of these before making any decisions. \n\n\n\nThe potential disadvantages of a sale-leaseback in commercial real estate include:\n\n\n\n\nReduction of assets\n\n\n\n\nThere\u2019s no getting around the fact that property is an extremely valuable asset to own. This is particularly the case if you no longer have a mortgage on the property and it\u2019s located in an area with high-demand and low-inventory of real estate. In the right circumstances, your ownership of the land in a growth area can vastly raise the value of your company. Selling the property in exchange for a rental agreement means you no longer have this asset at your disposal, which can alter opportunities with potential investors or partners in the future.\n\n\n\n\nSale during poor market conditions\n\n\n\n\nIn some instances, seeking a sale-leaseback arrangement is a necessity rather than an optimal choice. Your company may need to liquidate assets to pay off mounting debts or to take advantage of time-limited investment or growth opportunities. As such, you may find you\u2019re having to sell the property at a time in which the local commercial real-estate market is at a low point. The result being that you get a reduced return on your investment than you might a few years down the line.\n\n\n\n\nPotentially higher rental rate\n\n\n\n\nYou may find that your need to sell to lease your property puts you in a disadvantaged position. While owning a property in a high-value market location is good for the amount of liquid capital you can generate, this might not be so positive for the amount of rent you have to pay. Indeed, this may be several times higher than the mortgage payments you are currently making on the property. It\u2019s also important to bear in mind that if you are locked into a long-term lease at a fixed rental rate, you may wind up paying above value if the local market takes a downturn.\n\n\n\n\nPossibility of need to relocate\n\n\n\n\nWhile you\u2019re gaining a lease following the sale, this is still a finite situation. At the end of your lease period, the buyer may choose to either resell the property to a developer or rent to a different business. This means that you could be spending the next several years continuing to build and bolster your local profile only to find that you still have to relocate at a later date. It\u2019s true that many landlords will have a preference for keeping a tenant for a significant period of time. But this doesn\u2019t change the fact that by selling your property you are also taking on the risk of having to move if you\u2019re unable to later repurchase the land.\n\n\n\nWrapping Up\n\n\n\nA sale-leaseback in commercial real estate is a way for a business to sell their property while still occupying it. There are certainly significant benefits to this approach, particularly if your company owns the property outright or can gain from a better balance of assets to debts. However, it\u2019s vital to understand how selling this asset can put you in a vulnerable position. While sale-leaseback can be an effective tool, it\u2019s important to understand the full extent of the impact it can have on your company before making any decisions.