Sale / Lease Back

823 Words4 Pages
Sale/Lease Back

Sale/leaseback is a financing tool that became popular in the 90´s due to the tightening of the credit. This type of financing was used by small and medium companies that needed cash to grow their business but their only real estate asset was their business facility.

We had two interviews with bankers that explained to us how is the deal made and what are the benefits it brings. Javier Jaramillo is a senior VP of Investments at UBS and has been a banker all his life. Although he doesn´t deal right now with this kind of financing he learned about sale/leaseback when he worked at Wachovia. The other person we interviewed is Roberto Erana an MBA student at Babson that is a former VP from Bank of America which is a bank that offers this kind of financing.

1. When a Company uses Sale/leaseback.

When companies are needing financing they have various options in the markets to find the funds they need to cover their cash requirements for growth, but when is difficult for them to find credit lines because the credit is tight due to economical situations they have to find creative ways to fund their capital investitures. Sale/leaseback can be a good option. Also when the owners of a company want to cash out earnings and lower the capital invested in the company the sale/leaseback can be an option.

2. How does it work.

Retail or Commercial Banks, financing companies and investor funds are the institutions that offer the sale/leaseback option as a financing method. The deal is structured in a way that the company needing the finance sells the fix asset to the financing company for cash and immediately a lease agreement is signed for a long term lease, typically a 15 to 20 years contract with renewal options. What the company is doing is freeing capital they had invested, so that they can use it for other investing activities or purposes. “The terms will include a base rent computed as a percentage of the purchase price. Typically, periodic rent escalators will be included in the lease; these may be pegged to some indicator such as the Consumer Price Index, the tenant's business revenues, or both.” This agreement can also include other terms so that the tenant can control the variable costs of the asset such as maintenance, insurance etc.

3. What assets are suitable for Sale/leaseback.

Real estate assets as buildings, land or machinery and equipment are suitable for sale/leaseback operations.

More about Sale / Lease Back

Open Document