Sale-leaseback for BC business owners

You own the building your business runs from, maybe a warehouse in Burnaby or a shop and yard in Surrey, and you want cash for growth, debt or retirement without packing up. It also helps the family member or advisor sitting next to you at the kitchen table.

• In a Sale-leaseback, you sell the property to an investor and sign a new lease to stay. The lease is the product the investor is buying.
• Price and rent are linked. A higher price usually means higher rent, and the rent has to work for your business for the whole term.
• Your Covenant (tenant) (your company's financial strength) drives investor interest and pricing.
• Goods and Services Tax (GST), Property Transfer Tax and income tax all need advice before you sign. Nothing here is tax or legal advice.
• Compare it honestly with alternatives such as refinancing, a Vendor take-back (VTB) on a later sale, or selling and moving.

How a sale-leaseback works

You and the buyer agree two things at the same time: the purchase contract and the lease. The investor looks at the rent, the term, who pays costs under a Net lease or NNN (triple net) structure, and the risk that you'll stay and pay.

They then price the building largely as an income property, often using a capitalisation rate (cap rate) on the rent you've agreed to pay.

Because you're setting your own rent, you're partly setting your own price. Push the rent up and the price may follow, but your business pays that rent every month for years. A big cheque today can turn into a heavy invoice every first of the month.

Why owners consider it

• Free up equity for growth, debt reduction or new equipment without taking on a mortgage.
• Plan for retirement or succession while the business keeps operating in the same place.
• Shift the risks of ownership, such as major roof or structure costs, to the landlord, depending on how the lease is written.
• Simplify the balance sheet before selling the business.

Why it might not suit you

• You lose future appreciation and redevelopment upside, which in parts of Metro Vancouver can be significant. Look at Highest and best use and Land lift before deciding.
• Rent is a permanent fixed cost for the term, even if business slows.
• You become a tenant, with less control over the property, alterations and future use.
• If you later want to sell the business, the buyer has to accept the lease and the landlord may need to consent.

Step by step

1. Get clear on the goal: how much capital, for what, and over what timeline.
2. Get an estimate of value as an owner-occupied property and as a leased investment. They can differ.
3. Talk to your accountant early about the tax effects of a sale, including Recapture of capital cost allowance (CCA), capital gains and whether a share sale or asset sale makes sense.
4. Draft the key lease terms you can live with: term, rent, increases, renewals, costs, repairs, assignment and exit rights.
5. Prepare a data room with financial statements, building reports, title, leases and environmental information.
6. Market the opportunity to qualified buyers or approach a short list, with your representative.
7. Negotiate the price and lease together. Don't finalize one without the other.
8. Complete due diligence, remove subjects and close, with your lawyer handling the transfer and lease signing at the same time.

What investors look at

• The tenant's financial statements, history and outlook.
• Lease length, rent, increases and who pays what.
• Building condition, using a Building condition assessment and environmental reports such as a Environmental Site Assessment (Phase I).
• Location, zoning and alternative uses if you ever leave.
• Title, easements and covenants on the property.

What to negotiate in the lease

• Term and renewals. A long initial term gives the investor security, but make sure you have Renewal options on fair terms so you can stay as long as you need.
• Rent and increases. Agree a rent your business can carry through slow years, and fixed or market-based Escalation clauses you can model.
• Costs and repairs. Spell out who pays for structure, roof and major systems. In an absolute net lease, you may carry almost everything.
• Assignment and change of control. If you might sell the business, make sure an Assignment (lease) or share sale won't be blocked unreasonably.
• Buyback rights. Consider an Option to purchase or a First right of refusal (ROFR) if you want a path back to ownership.
• Use and alterations. Make sure you can keep running and adapting your operation.
• Guarantees. Limit any Personal guarantee by amount and time.

Tax, legal and regulatory points

• Tax names used here: Harmonized Sales Tax (HST). The Canada Revenue Agency (CRA) handles federal tax. GST generally applies to sales of commercial real property; how it's handled depends on registration and the contract. See CRA GST/HST Memorandum 19.4.1.
• Property Transfer Tax is generally payable by the buyer on registration. See Property transfer tax (Government of BC).
• Income tax effects, including capital gains and recapture, should be modelled by your accountant. See CRA Guide T4037: Capital gains.
• If the property is held in a company, the choice between selling shares and selling the building changes tax, PTT and lease consent. See Share sale and Asset sale.
• Your lawyer should review the purchase contract and lease together.

Rent coverage on the business statements

Underwrite sale-leaseback rent against the operating statements of the business that will pay it. If coverage only works on a hopeful year, the buyer’s lender may not care how clever the equity takeout looked.

Term, options, and capital responsibility should read like a real investment lease. Tax is an accountant question before structure is locked.

Process mirrors other commercial sales—plus a lease the market can buy.