Previndran is the CEO of Zerin Properties and consults companies & government agencies in the real estate space. He is also passionate about usage of Technology in real estate and is one of the first few to implement IoT in property management, as he wants to make Malaysia a better place to live in.

Gunaprasath Bupalan – Property360Digest

Sale and Leaseback is the sale of an interest in a property and the subsequent leasing back of that same property. It is one of the best tools to use in generating capital from Real Estate. This form of financing starts as a sale and the seller then agrees to lease back the property being sold. Sometimes this leaseback can merely be a move to entice the buyer into the transaction. In its more effective use, the sale and leaseback is a technique that allows the seller to maintain the use of the property.

On the Corporate front for the GLCs, real estate sale and leaseback is when a business sells its commercial property for its fair market value and then immediately leases it back. It is also used by developers to build a corporate building, serviced apartment or hotel as “financed” by the purchasers, but most importantly, the GLC retains control of the property.

Here are some of the resulting benefits of a Sale and Leaseback for a GLC :

 Free-up capital for re-investment.
 Improve the balance sheet.
 Receive 100% of Open market value.
 Low payments with long terms (up to 25 yrs.).

This has become an increasingly popular means of generating capital for immediate use. A sale – leaseback vehicle unlocks the value in real estate assets and provides the GLCs with immediate working capital.

How does one start?

  •   Firstly determine the Open Market Value of the property
  •   Then ensure the existing or potential cash flow/opportunity cost in the said property.
  •   Then you determine the Yield that you will be providing and the basis of the yield i.e. Nett, Double Nett or Triple Nett. Based on this yields and cashflows,
  •   You will then need to structure the “deal” i.e. Vendor’s Obligations, Purchaser’s Obligations and in some cases, a third party “Lessee’s Obligations”.
  •   The next is of course to package the whole thing together and commence the marketing of the product.

    From the buyers perspective, what do they buy in a scheme like this? We advice to only participate in Sale and Leaseback schemes where the seller or their nominee uses and maintains the use of the property i.e. as a hotel or a serviced apartment or for other business usage. This kind of scheme would ensure that the seller is still involved and committed in the success of the Scheme for a long term.

Issues to look out for in a Sale and Leaseback scheme include (for both buyers and sellers)

  1. Term of Tenancy. The longer the better, but the norm is usually 3+3+3.
  2. Date of Commencement of Tenancy, especially if sold as an off the plan development.

    Ensure that the date is fixed.

  3. Rental Amount. It will usually be a percentage of the Purchase Price or in some cases will also include a profit sharing ratio. Acceptable percentage levels include 6%-8% on both gross and nett levels and acceptable profit sharing levels will be 60% to the owner and 40% to the Seller/Nominee. It is important to ensure what the percentage level is and also the terms of the returns, i.e. whether it is Gross or Nett. Do look out for what are the costs that one will have to bear, including Quit Rent, Assessment, Service Charges etc and whether the payment is nett of all this amounts.
  4. When the Rentals are Paid. For cashflow reasons, please check this clause carefully. Payment mode will differ from Quarterly, Half Yearly or even Yearly in advance.
  5. Furnishing (if applicable). In most serviced apartments or hotel, furnishing is a requirement. Ensure if it is part of the purchase price or is separate and also ensure that the furnishing is the same for the whole development. This would make sure that there are no preference units.
  6. SinkingFund. Look out for the establishment of the sinking fund for the Building.Very important especially is sale on Strata. In event the sale includes the Furniture, ensure the Seller/Operator also provides a sinking fund for your furniture.

There a lot of advantages in a Sale and Leaseback scheme, for both the Seller and the Buyer. However, the Sale and Leaseback is actually more complicated than it appears on surface. It requires good, sound structuring, packaging, marketing and possible legal and tax considerations. One should never enter into a sale and leaseback unless there is absolute confidence that the transaction is beneficial to both parties.


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