Birmingham Small Business.com

Courtesy of Fortune Small Business:

Sale-leaseback deals can offer small business owners who own the real estate their business operates in an infusion of cash. If after reading this article and performing your own research on the topic you are interested in obtaining more advice, I can recommend Andrew Sink at Founders Investment Bank here in Birmingham, Alabama.

Large companies have used sale-leasebacks for decades to unlock cash trapped in brick and mortar and apply it to more productive uses - paying down debt, buying equipment, or hiring more employees.

Small and midsized firms are now seeing the advantages too, says Jon Hipp, president and CEO of Calkain Cos., a real estate investment firm based in Reston, Va. He estimates that sale-leaseback activity among small-business owners in his area has grown 10% to 15% annually over the past two years and expects that trend to escalate. The reasons: Sale-leaseback deals are spreading to all types of commercial property, the Internet has helped business owners peer into the market through sites such as loopnet.com, and, says Hipp, “it’s more common to run across someone who has done one.”

Ken Pachla, CFO of SET Enterprises, a company in Warren, Mich., that manufactures auto components, has used sale-leasebacks several times, recently selling two plants to Austin-based AIC Ventures for $13 million and occupying them under 15-year leases. The proceeds are going toward equipment and new hires. “We felt we could put our money to better use if we used it to grow our business instead of owning real estate,” Pachla explains.

Sale-leasebacks can be employed to boot-strap businesses too. Mark Parmerlee of Dallas bought the six-restaurant Mexican food chain Jalapeno Tree in 2004. By using his real estate, he has grown the business to 13 stores, with total 2006 revenues of $27 million. He has done eight sale-leaseback deals, raising $13 million to plow into expansion. “It is more attractive for us to take capital out of our existing locations and use that as the equity for other projects,” he says.

Michael Federman, a New York City - based entrepreneur, even used a sale-leaseback to acquire a business - pulling off a sort of leveraged buyout. He arranged to simultaneously sell the 11,000-square-foot building owned by Larada’s Army Surplus in Mesa, Ariz., while he was buying the business, using the $2 million from the sale to acquire the company. He signed a 20-year lease for $180,000 a year.

This may be a great moment to think about capturing built-up equity in offices, factories, or stores. Commercial real estate has not yet felt much effect from the housing slump, and the value of buildings in many parts of the country has risen sharply since 2002, producing paper profits that could disappear if the economy slows.

Sale-leasebacks are complex transactions, so the first step is to find a capable broker. Hipp suggests getting referrals from local real estate lawyers, tax accountants, and bankers. Most national brokerage firms employ specialists dedicated to sale-leasebacks and have access to investors.

Once ownership changes hands, the seller continues to occupy the space under a long-term lease. The terms vary as to how much control the former owner has and how much upkeep he’s responsible for; in a “triple net lease” deal, the tenant picks up all operating costs, including taxes. Because Jalapeno Tree is a triple-net tenant, its monthly operating expenses have remained about the same. But Parmerlee says that his net has improved, and the upside from adding new locations, each of which can spin $2 million in annual sales, eclipses any downside.

Leasing may have tax advantages too. A company can deduct all monthly rent and building operating costs as business expenses; owners deduct only interest and operating costs - and must generally depreciate commercial property over 39 years.