I breathed a sigh of relief as I signed the final page in the small mountain of paperwork in front of me.
It was done.
I had just closed on a $50 million deal on behalf of my partnership of investors. We were now officially buying 20 buildings from Alltel.
Some of you may be too young to remember, but Alltel was one of the country’s largest telephone companies. In the 1990s and early 2000s, it was a leading wireless service provider.
The name isn’t around anymore, though. It was eventually taken over by private equity. And today, parts of its network are owned by AT&T (T) and Verizon (VZ).
My point is, Alltel was a stable, solid company at the time. And the sale-leaseback deal I had just made was a win-win for both the company and my investors.
Now, you may be wondering: What is a sale-leaseback?
At Intelligent Income Daily, we draw on our decades of experience in the real estate and stock markets. By doing so, it’s our goal to educate you on the various practices that make businesses wealthy… and generate income for shareholders.
Today I’ll explain how sale-leasebacks, an innovative form of financing, work. You’ll learn how companies use them to create value… and how this insight can put you ahead of most investors.
And tomorrow, check your inbox. I’ll be back with a follow-up on why this is the perfect time for these kinds of deals… and the kinds of companies that stand to benefit.
Sell Your Building, and Keep It Too
If you think about it, a sale-leaseback explains itself. It’s a contract to both sell a property and, at the same time, start a lease agreement to rent that property.
But why in the world would you want to do something like that?
Suppose your company owns a building worth $1 million. You see a business opportunity, but you don’t have enough money to go for it. What do you do?
Maybe you try to raise money by selling shares. But what if it’s a bear market and your shares are down in the dumps? Trying to sell more shares now could make existing owners angry.
You can’t just sell the building because you still need to use it for your business.
You could go to the bank and take out a mortgage on the building. But a bank isn’t going to give you a loan for $1 million. The building is going to be its collateral. And if things go sideways, the bank will want to foreclose and get its money back as quickly as possible.
A bank will likely give you a loan for 65% of the value. Plus interest rates are high, so you’ll be paying an arm and a leg to borrow.
That’s where the sale-leaseback comes in.
You get the full value of your building up front, since you’re selling it off. But, you get to stay and keep using it for your business because you also have a lease contract with the new owner.
Lease contracts can often be negotiated to last 10 to 20 years with options to extend, so you’ll have plenty of time to decide if you want to move out.
Your monthly expenses will go up a bit due to rent. But that increase might be less than what you would have to pay in interest on a loan.
Plus, rent is an operating expense that’s completely tax deductible, while interest on a loan is not.
You can see how the flexibility of a sale-leaseback contract makes it an attractive way for companies to raise money with the real estate they own without compromising the day-to-day operations of their business.
A Win-Win Setup
What about the other side of the deal? What does they buyer get out of it?
Well for one, they’re buying the property outright. Presumably, they see value in the real estate. If it’s a type of building that’s in high demand and in a good location, it will appreciate over time.
Plus, since there’s a lease agreement attached to the purchase, they’ll get steady rental income. And they likely won’t have to look for a new tenant for a long time.
For an investor willing to hold real estate for the long term, sale-leasebacks are a quick and simple way to add another source of cash flow to their portfolio. There’s no need to build or modify a property, and no need to market it to find a tenant.
Now that you know how sale-leasebacks work and why they’re a win-win for both the buyer and the seller… you’re ready to learn how savvy companies use them to create value.
It’s the reason why I struck that $50 million Alltel deal. And knowing this will put you ahead of most investors when researching companies that own real estate.
I’ll tell you about that tomorrow. And I’ll share why this is the perfect time for these kinds of deals… what kinds of companies stand to benefit… and give you the names of a few on my radar.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily
P.S. Along with sale-leasebacks, there are dozens of other lesser-known methods businesses use to create value for their companies. And we pore through all the filings, reports, commentary, presentations, and press releases detailing them… so you don’t have to.
Every month in our Intelligent Income Investor newsletter, we’ll share all the “hidden” ways companies can boost value and reward shareholders. These income-reinforcing practices help us determine whether companies can withstand pullbacks and support growth – crucial to our strategy for earning income. To learn more about it, click here.