Leaseback Real Estate

What is real estate leaseback? Definition of a loan on real estate:

A Real Estate Leaseback is a loan against Real Estate.   The owner of the Real Estate can be an individual or business.   The Real Estate is sold then leased back, allowing the owner to obtain capital and complete a leaseback Real Estate.

A real estate leaseback, versus equipment leaseback, is typically a better choice if the most capital possible is needed.   The loan and leaseback against real estate will usually provide the most working capital.

“Loan against Commercial Property”, also know as a “Loan on Commercial Property”, or
“Loan on Commercial Property” are considered by Investors.   Some investors refer to
this as a “Loan on Commercial Real Estate”.

Regardless, in this transaction, real estate is sold for cash, with a lump sum of cash going to the seller.   The real estate is leased back with a purchase option at the end of the term.   The seller remains on the property during the entire term of the transaction.
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Callers call in with different requests.   Callers will ask for a Real Estate Leaseback, or a loan against real estate, or a loan against commercial real estate.   They will also ask for a commercial real estate leaseback and to leaseback commercial real estate.

How to get a real estate leaseback.   Steps, direction and tips.

Research companies that have commercial real estate leaseback and residential real estate leaseback as primary programs.   Consider minimum funding amounts, rates, LTV loan to value requirements, and types of property that qualify.  Also review total processing time from application to funding.

Minimum loan amounts are usually $100,000.  Most programs are against commercial property.   Requirements often vary state by state depending on state real estate laws.  Some programs may not be available in all states.

Opt for the program that most fits your commercial or residential real estate property.

You want the program that is going to be the best option for your commercial real estate.

Contact funding programs and make sure your commercial or residential property meets funding program requirements.

Make contact and discuss your commercial property. Try to assess whether your property meets funding program requirements based.

Submit an application for funding.  Include any documentation that increases your chances for approval, higher offer amounts and better terms.  This can include a recent property appraisal, tax returns and income property information such as rent rolls.

Apply for funding. Provide any information that makes your request stronger.
With any real estate leaseback offer or approval, review the term sheet provided that includes conditions and closing requirements.  If satisfied, provide items required for closing and funding.  Borrowers paying for an updated appraisal and other closing costs is standard.   Complete the transaction and receive funding.

Frequently asked loan on real estate questions:

Question:  How can i get a loan on my real estate?
Answer:  You must have residential or commercial real estate with a loan to value of less than 70%.     You must also be on the deed.  Any liens on the property will go against the 70% LTV, also known as loan to value.
Question:  Can I get a loan against my residential real estate or only commercial?
Answer:  You can get a loan against either residential or commercial property. The property must be in the name of the applicants.
Question:  What if I am behind on my mortgage?    Can I still get a loan against it?
Answer: It depends on how far behind you are.   If you are less than 60 days behind you should still be able to get an offer if you meet the other conditions.
Question:  Can I payoff my merchant cash advances with my real estate?
Answer:  You can use your commercial or residential real estate to payoff your mca merchant cash advances.   If you have at least 50% equity in your real estate then you have a good chance of being able to use it to payoff your merchant cash advances. Approvals are more likely and for more money when you use your real estate. If your business is suffering from merchant cash advances use your real estate for a fast and effective solution.
Question:  I need money against my real estate fast.  How long does it take?
Answer:  Funding can be as fast as a few days.  In most cases it will be two or three weeks.   If you have a recent appraisal then funding can be fast.
Question: What are the terms and rates?
Answer:  Rates are in the high single digits to low teens.   Terms can include early payoff in 12 to 24 months.

Transaction Dollar Amounts

The minimum dollar amounts on a Leaseback Real Estate is $100K with a maximum of $5,000,000.    Since the average property size is $250K and up, the funded amount on a Leaseback Real Estate will typically be $100K to $250K minimum, where as the average size loan on equipment is in the $50K range.

Loan to value, also known as LTV, will vary somewhat depending upon credit and the financial position of the seller.    The maximum loan to value is usually 75%.

The property in a Leaseback Real Estate will contain a structure in addition to the land.   The structure can be either a free standing commercial building, or affixed to part of a larger structure.  A strip shopping center is an example.   Other acceptable property types are apartment buildings, gas stations, convenience stores, office buildings, restaurants, and industrial plants.   Whether the structure is included in the transaction is at the discretion of the lender.   If the value of the structure is minimal, the lender may decide not to include it in the transaction.

Even though real estate values are still recovering since late 2008,  this form of financing still has many strengths and opportunities.   Real estate values have increased significantly in several markets in the United States.    For many market locations, values have not recovered as dramatically but this form of financing is still viable for many borrowers.

If the potential borrower in a leaseback real estate has significant equity, the strong equity position insulates them from market fluctuations.   This increases the prospects for approval for a significantly higher funding amount.   Our representatives will discuss the details of your scenario with you.    You will understand and proceed on the most viable and best form of financing based on your situation.

Why this Transaction?

This form of financing can be especially effective for businesses in need of significant funding amounts, without as many of the extensive requirements of traditional financing.    Businesses in need of working capital will obtain a greater result by using their Real Estate for their business rather than simply owning Real Estate.   Terms will be significantly shorter than traditional Real Estate Financing.   Terms are usually 5 – 10 years.    This will allow the Seller to fully re-acquire ownership of the Real Estate.  At that point, they can retain full equity, or consider another Leaseback Real Estate for additional working capital for their business.

Our experienced industry professionals, experienced in both Leaseback Real Estate and a Leaseback using Equipment will quickly guide you through the process.   

Leasebacks involving equipment or vehicles bring in revenue into the business.   However, using real estate will bring in the most capital into the business by far.  The borrower can expect an environmental survey to be required.    The cost of the survey will normally be $500 to $1,000.

The leaseback real estate option

A real estate leaseback can bring in millions of dollars in comparison to an equipment leaseback.   An equipment leaseback usually generates only tens of thousands of dollars.   Corporations that have over $10,000,000 in sales per year or higher should first review their real estate holdings to determine which financing type would be better suited for their needs.

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computer equipment

A computer equipment loan, is a way for businesses to get working assets by using their computer equipment as security.

Computer equipment is the type of collateral which depreciates the fastest.   Whether the collateral will have much value, or any, will depend primarily on how old the equipment is.  The equipment typically must be less than 90 days old and have significant value.   In most cases full financial information must be submitted. The last 2 years business tax returns, interim financial statement will be required.

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When it comes to computer electronic equipment, especially desktop computers, laptops, and software, after 1-2 years, the value will have dropped dramatically.   Values will drop possibly as much as 50% – 75% in that time and the amount of working capital that can be obtained in a loan against computer equipment, or computer equipment leaseback, will be substantially reduced.

If the lender were to repossess the collateral, employ an outside vendor to re-market the equipment, they will only get 10 – 20 cents on the dollar.  This results in making the repossession of the collateral possibly not worthwhile to the lender and may lenders will not repossess the collateral.

As a result, in many cases, lenders will consider computer equipment almost an unsecured transaction, which has an impact on the credit review and approval process.   If an applicant gets approved for a leaseback of computer equipment and makes at least half the payments, it is very likely the equipment will never be repossessed, even if there is a default after the halfway point.

Regardless of the risk and credit issues, computer equipment is a very realistic and unique funding options for almost all businesses.    There are several reasons why a loan against equipment in the $10,000 to $50,000 range is very viable.  More businesses have equipment than any other asset.   More businesses will qualify for $10,000 to $50,000 in financing then will qualify for $100,000 to $250,000 in financing. These factors put more businesses in play for funding than any other secured funding program

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Leaseback – Why credit matters

For a leaseback transaction, in which the owner of equipment or real estate sells the asset for cash, then leases it back, does the business credit and personal credit matter?

In such a transaction,  if the wholesale or liquidation value of the asset covers the balance of the leaseback, then does credit matter? In fact, credit does matter.    In the event of non-payment and default, the value of the asset, especially equipment, may depreciate faster than the balance of the debt.

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In such a case, if business and personal credit were not reviewed for the leaseback, the lender may find themselves upside down and facing as loss on the transaction in a default situation.

Further, regardless if the value of the equipment or real estate asset, the lender’s preference is almost always for the borrower in the leaseback to pay as agreed rather than default.    In a default involving equipment, the lender is typically forced to hire an outside vendor to repossess the equipment, transport to a venue to liquidate, and will often receive lower than the balance owed on the debt, resulting in a loss.

Additionally, only a review of the business and personal credit can uncover judgement, collection, and tax issues that can jeopardize the lenders equity position in the transaction.

For these reasons, the lender in a leaseback will always want to review the business and personal credit of the potential borrower.

Small Business Loan Resources:

 

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Leaseback – How much does remarketed equipment bring in?

In a leaseback transaction, in which the owner of equipment or real estate sells the asset, receives cash and leases it back, how much does the lender recover in the case of a default?

While this depends upon many factors, in terms of the value of the equipment itself,  some types of leaseback equipment are simply more valuable in the short term, and often hold their value better in the long term.

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An example of this is construction equipment such as skid steers, dozers, ditch witches, as well as tractors for long haul trucking.   Equipment which does not retain it’s value well in a leaseback transaction is computer and electronic equipment, which obsoltes extremely quickly due to new technology and has a relatively low value in a short amount of time, often bringing  back as low as 10% to 30% of it’s original value after only 1 or 2 years.

Other types of equipment will lose their value more moderately, such as industrial equipment, restaurant equipment, medical equipment, and machinery.

Regardless of the equipment types, equipment clearly will not hold it’s value, while over time, real estate will, and is a stronger form of collateral, returning significantly more to the lender in the even of a default.

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Realtor.org –  National Real Estate OrganizationTrade organization for real estate agents. Includes overview, code of ethics, activities, and membership information.

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Leaseback – Why is Heavy Equipment best?

Leaseback  – Why is heavy equipment best?

What equipment is best to use for a leaseback?    In a leaseback transaction, the equipment is sold.  The seller receives a windfall of cash, then immediately leases the equipment back to own without ever relinquishing the equipment.  Heavy equipment, such as construction equipment, is the best equipment to use.      Tractors used for 18 wheelers can also be very good collateral to use for such a transaction.

Heavy equipment of this type holds it’s value in a leaseback.  It takes longer to become obsolete.   Other type of equipment such as computer equipment, medical equipment, landscaping equipment, even Restaurant equipment, obsolete more quickly.
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Some types of heavy equipment, most especially construction equipment, may still be very useful and desirable, even when it is 15, 20 years old.   That is if the condition is still good.    This is true especially for construction equipment.

With the construction industry being in a major slump, both residential and commercial, this is a surprise.   Construction equipment maintains it’s value in a leaseback in large part because this equipment is so widely used and has a large secondary market.   There are many venues to sell Construction equipment in the event of a default.   Tractors for the trucking industry will always be in demand for a good price.  There is a large secondary and wholesale venue for tractors.

Prices will be relatively stable for this type of equipment over time.  Lenders know approximately what minimum price they will receive if they hold this equipment as collateral, which is why they are considered desirable types of equipment in a leaseback transaction.

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Real Estate Leaseback versus Equipment Leaseback

Why do an Real Estate Leaseback versus Equipment?  If your goal is to get $100,000 or higher, a Real Estate Leaseback may be better.    If your company needs less than $100,000, an equipment leaseback has several advantages over a real estate leaseback.

An equipment leaseback can often times be completed with just a one page application.   An equipment leaseback does not often require a formal asset appraisal by an independent company.  The transaction is faster.   It typically only requires 1 or 2 weeks completion time.   Closing is easier and less documentation is required.
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Since less paperwork and financials are required, less information is analyzed that could cause a decline.   The more documentation that is required, the more likely something will trigger a decline.

The above factors should be considered when deciding which financing to apply for.

Small Business Loan Resources:

Realtor.org –  National Real Estate Organization Trade organization for real estate agents. Includes overview, code of ethics, activities, and membership information.

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Commercial Real Estate Leaseback

Can a business get a Commercial Real Estate Leaseback in this market with current real estate values?   Yes, Commercial Real Estate Leasebacks are happening.    Full appraisals,  additional scrutiny of cash flows through the review of 2 to 3 years of tax returns, bank statements, rent rolls if not owner occupied, and lower LTV’s, and more may well be required in the current environment.   The lower LTV on a commercial real estate leaseback is a big issue.

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The lender wants to protect themselves in a sinking market by lowering the LTV’s.     Instead of 60%, 70%, or 80% LTV’s, 40% – 60% LTV’s may be in order.     After a sound cash flow situation of the borrower is verfied, the lower loan to value will primarily protect the lender in this environment.    This is to be expected to continue throughout 2011 and 2012.

After the full appraisal is completed, if the value is sufficient and credit is acceptable, the lender will do an environmental survey.  Upon passing the survey, the lender is ready to proceed with a Commercial Real Estate Leaseback.

Commercial Real Estate Leaseback Resources:

Realtor.org –  Provides important sales and statistical real estate information