Both release capital while keeping the use of a property. The differences in ownership, cost and control are substantial.
Businesses and individuals who need capital but also need to continue occupying a property face a choice between borrowing against it and selling it to a party who leases it back. The two arrangements look similar in cash terms and differ fundamentally in what you retain.
Sale and leaseback at a glance
Selling the property and taking a lease to continue occupying it, releasing the full value while retaining use.
Borrowing against the property at a glance
Raising a facility secured on the property, retaining ownership and any future appreciation.
Capital released
Sale and leaseback: The full value less transaction costs.
Borrowing against the property: A portion of value determined by the provider.
Ownership and appreciation
Sale and leaseback: Transferred entirely. Future value accrues to the buyer.
Borrowing against the property: Retained, including any future appreciation.
Ongoing cost
Sale and leaseback: Rent for the lease term, which is typically subject to review and can rise.
Borrowing against the property: Financing cost, which ends when the facility is settled.
Control
Sale and leaseback: Limited by the lease: alterations, use and duration are governed by its terms.
Borrowing against the property: Retained, subject to the security arrangement.
Long term position
Sale and leaseback: At lease end, you have no asset and must renegotiate or relocate.
Borrowing against the property: Once settled, you own the property unencumbered.
When sale and leaseback wins
- You need the full value rather than a portion of it.
- The property is an operational asset rather than an investment you want to hold.
- You prefer a lease obligation to a financing obligation.
- Capital released has a use that outperforms holding the property.
When borrowing against the property wins
- You want to retain the asset and its future value.
- The amount required is a portion of value rather than all of it.
- Control over the property matters, including alterations and eventual sale.
- The financing cost is acceptable relative to the alternative.
How to decide
Consider sale and leaseback when you need the full value, the property is operational rather than strategic, and the capital has a use that outperforms owning it. Borrow when you want to retain ownership and the required amount is a portion of value.
Compare the two over the full horizon, not at the moment of the transaction. Model the rent across the lease term against the financing cost across the facility term, and add what the property is likely to be worth at the end. That figure is what sale and leaseback gives up.
If you are weighing a financing decision, Domira can review the offers, model the total cost and stress test the obligation with you before you sign anything.
Frequently Asked Questions
Is the rent in a leaseback negotiable?
The rent, the lease term and the review mechanism are all part of the transaction and are negotiated alongside the price. A higher sale price accompanied by a higher rent is a different transaction from a lower price with a lower rent, and the comparison requires modelling both.
What happens at the end of the lease?
That depends on the lease terms, including any renewal provisions. This is the point at which the loss of ownership becomes concrete, and it should be considered at the outset rather than at the end of the term.
Is sale and leaseback only for commercial property?
It is most common in commercial and operational property, where the building supports a business rather than representing an investment. Arrangements affecting a home should be approached with particular care and independent advice, since the consequences of losing occupancy are severe.
Have a Property Question?
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