The headline price is what the buyer pays. The cash the company can spend is what is left after tax, the old mortgage and the buyer's security.
A sale and leaseback raises the price less selling costs, tax on the gain over the building's tax base, the mortgage it repays and any rent deposit the buyer holds back. On an illustrative distribution centre sold for 50,000,000 at a 6.25 per cent yield, the company ends up with 22,515,000 of usable cash, 45.0 per cent of the headline price. The largest deductions are the existing mortgage and the tax, not the fees.
Worked in full in Sale and Leaseback by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Boards approve sale and leasebacks on the headline price because that is the number the buyer offers. The treasurer has to fund something with what is left. The two can be very far apart on an old building with a low tax base and a mortgage on it, and the gap is entirely predictable before the heads of terms are signed.
| Input | Value |
|---|---|
| Initial rent agreed in the leaseback | 3,125,000 |
| Buyer's net initial yield | 6.25% |
| Selling costs, agent and legal, % of price | 1.5% |
| Tax written-down value of the building | 22,000,000 |
| Tax rate on the gain (illustrative) | 25% |
| Existing mortgage on the building | 18,000,000 |
| Prepayment fee on the mortgage | 2% |
| Rent deposit required by the buyer | 6 months |
Price = rent ÷ yield = 3,125,000 ÷ 6.25% = 50,000,000
Taxable gain = price − selling costs − tax base
Net cash = price − costs − tax − mortgage − prepayment fee
Usable cash = net cash − rent deposit
In Excel, with the price in B2: =B2-B2*1.5%-MAX(B2*(1-1.5%)-22000000,0)*25%-18000000*(1+2%)-3125000/2.
Selling costs at 1.5 per cent are 750,000. The taxable gain is 50,000,000 less 750,000 less the tax base of 22,000,000, so 27,250,000, and tax at 25 per cent is 6,812,500. The mortgage must be repaid because the building leaves the borrower's hands: 18,000,000 plus a 2 per cent prepayment fee of 360,000. That leaves 24,077,500 of net cash, 48.2 per cent of the price. The buyer then holds six months of rent, 1,562,500, as a deposit against tenant default for as long as the lease says, and that money cannot be spent.
| Line | Amount | % of price |
|---|---|---|
| Headline price | 50,000,000 | 100.0% |
| Selling costs | -750,000 | 1.5% |
| Tax on the gain | -6,812,500 | 13.6% |
| Mortgage repaid | -18,000,000 | 36.0% |
| Prepayment fee | -360,000 | 0.7% |
| Rent deposit held by the buyer | -1,562,500 | 3.1% |
| Usable cash | 22,515,000 | 45.0% |
The transaction converts 50,000,000 of building into 22,515,000 of cash the company can deploy. The gap of 27,485,000 is not lost: 18,000,000 of it repays debt the company would otherwise carry. But it is not new liquidity either, and a board paper that presents the price as the cash raised overstates the funding by more than double.
Compare the obvious alternative. Keeping the building and refinancing at 60 per cent of the same 50,000,000 gives a 30,000,000 loan; after repaying the 18,000,000 mortgage and a 1 per cent fee of 300,000, the new cash is 11,700,000. The leaseback still raises 1.92x as much, which is the honest case for doing it. The comparison flatters the mortgage slightly, because a lender would value the building with vacant possession rather than with a twenty-year lease to its owner.
The cost of the cash should be measured on the usable amount too. The rent of 3,125,000 replaces 990,000 of interest on the old mortgage at 5.5 per cent, an extra 2,135,000 a year. On 22,515,000 of usable cash that is 9.48 per cent before tax and before indexation, against the 6.25 per cent yield quoted on the headline. Whether that is cheap is the question set out in whether a sale and leaseback is cheaper than a mortgage.
Two inputs move the answer most: the yield the buyer pays, which sets the price, and the tax base, which sets the tax. A building bought decades ago, or heavily depreciated for tax, has a low base and pays tax on most of the price.
| Yield | Price | Base 10,000,000 | Base 22,000,000 | Base 40,000,000 |
|---|---|---|---|---|
| 5.75% | 54,347,826 | 22,726,957 | 25,726,957 | 30,226,957 |
| 6.25% | 50,000,000 | 19,515,000 | 22,515,000 | 27,015,000 |
| 6.75% | 46,296,296 | 16,778,889 | 19,778,889 | 24,278,889 |
Across the grid, usable cash runs from 36.2 to 55.6 per cent of the price. Every 50 basis points of yield moves the price by about 4.0 million, but only 73.9 per cent of that reaches usable cash, because costs and tax take the rest. If the group has tax losses that shelter the gain, usable cash rises to 29,327,500, 58.7 per cent of the price: the 6,812,500 of tax is the largest item a structuring adviser can actually change.
The common mistake is to compute the tax on the accounting gain. If the building is carried at 30,000,000 in the accounts, the accounting gain before costs is 20,000,000 and tax on it, after costs, would appear to be 4,812,500. The tax authority looks at the tax base, 22,000,000, not the carrying amount, and the actual charge is 2,000,000 higher. The accounting gain is a different number again under IFRS 16, which recognises only the part of the gain on the rights transferred, as worked in the IFRS 16 gain calculation; neither figure is cash.
The second mistake is to forget the deposit and any other security the buyer takes. A rent deposit, a parent guarantee or a letter of credit has a cost and, in the deposit's case, removes cash on day one. Six months of rent here is 3.1 per cent of the price.
Usable cash = price − costs − tax on (price net of costs − tax base) − mortgage and its prepayment fee − deposit. Here that is 22,515,000 on a 50,000,000 headline, 45.0 per cent. Build that bridge before the board sees the price. The book works the price itself from the other end, splitting it into the part that is property and the part that is exposure to the tenant; the free workbook for this case and the sale and leaseback model template carry the rent, cover and price arithmetic as live formulas.
No. Tax is charged on the price less selling costs less the tax base of the building, not its carrying amount. On a 50,000,000 sale with a 22,000,000 tax base, tax at an illustrative 25 per cent is 6,812,500. Using a 30,000,000 carrying amount instead would understate it by 2,000,000.
Usually, because it releases the whole value rather than a loan-to-value slice. Here a 60 per cent refinancing of the same 50,000,000 raises 11,700,000 after repaying the 18,000,000 mortgage and a 300,000 fee. The leaseback leaves 22,515,000, 1.92x as much, at the price of a twenty-year rent obligation.
Measure the extra annual outflow against the usable cash, not the price. Rent of 3,125,000 replaces 990,000 of mortgage interest, an extra 2,135,000 a year. On 22,515,000 of usable cash that is 9.48 per cent before tax and indexation, well above the 6.25 per cent yield quoted on the headline price.
This article is one calculation from Sale and Leaseback. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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