Real estate leaseback in relation to traditional financing methods.

There are many methods of obtaining financing for real estate assets, both debt and equity-based. Debt financing methods include: bank loans, corporate bond issuance, sale and leaseback, factoring, leasing, or shareholder loans.

Equity financing includes new share or equity issuance. In Poland, sale and leaseback is not yet as popular as in countries with more developed capital markets, such as the United Kingdom or especially the United States. However, in recent years, due to persistently high interest rates, there has been a noticeable increase in interest in this form of financing in Poland.

Let us start with the definition of sale and leaseback.

Sale and leaseback involves selling a property to an investor and then leasing it back from them. It is a form of financing that allows for the quick recovery of previously invested and frozen capital without the need to vacate the property, which could often mean halting, relocating, or even ceasing business operations.

Therefore, sale and leaseback is an effective method of raising capital for business development. It allows for the release of financial resources frozen in real estate, which generates a lower return compared to the possibility of reallocating these funds to higher-yielding business activities, while still benefiting from the use of the real estate assets. This process consists of two stages: first, the property is sold to an investment fund, and then its former owner signs a lease agreement, becoming the tenant. This allows the business to continue operating in the same location and under the same conditions, while the released capital can be used for further development.

Companies seeking external capital must decide on the most appropriate financing method. The scale of capital needs can vary—sometimes factoring is sufficient, but in many cases, companies aim to obtain the highest possible amount of funding. For companies owning industrial, warehouse, or office properties, sale and leaseback can be an attractive solution that enhances their business operations. In summary, three key advantages of sale and leaseback can be identified:

1. Quick Access to Larger Capital: The ability to obtain a significant amount of money in a short time, which can be beneficial in situations requiring immediate financing, such as rapid company growth.
2. No Need to Relocate Business Operations: The owner can continue to operate in the property, which is convenient and eliminates relocation costs.
3. Flexibility of Terms: The ability to negotiate lease terms, such as lease duration and rent amount.

Property Type: All types of properties are accepted, including retail, warehouse, office, and industrial properties, including those with specialized purposes. There are no requirements regarding the age or condition of the property. The properties do not need to be in prime locations; they can even be isolated.

Lease Term: A wide range from a minimum of 15 years up to 30 years, with numerous extension options, effectively covering the entire economic life of the asset.

No Covenants: Mainly the obligation to make timely payments, insure the property, and maintain it in usable condition.

Of course, like any solution, long-term leasing has certain disadvantages, which include:

1. Loss of Ownership: The owner loses ownership rights to the property, which may be culturally difficult to accept and reduces the value of assets on the balance sheet.
2. Rental Costs: Monthly rental payments may burden the tenant’s current budget. Their amount depends on the property’s location attractiveness and its long-term residual value.
3. Risk of Rent Increases: There is a possibility of future rent increases, which may raise leasing costs, although in most cases, rent in Poland is indexed to European inflation, which can be beneficial for the tenant in the long run.

Choosing the right financing method, preceded by thorough analysis, ensures stability and predictability. When assessing various financing options, it is worth considering factors such as the available funding amount, required equity contribution, debt servicing costs, repayment term, and the level of difficulty in meeting contractual conditions (so-called covenants).

How to Obtain Financing?

The process of obtaining financing through sale and leaseback is relatively short and usually takes between three to five months. Entities specializing in this form of financing are passive investment funds focused on sale and leaseback deals. The first stage involves preparing the necessary materials in the form of an investment memorandum. While there is no single imposed format, it is crucial to present complete and exhaustive information expected by sale and leaseback funds.

The memorandum typically consists of three main parts:

1. A description of the property subject to the transaction,
2. A characterization of the future tenant’s business,
3. A financial analysis, including available accounting data.

Cooperation with investment funds requires experience to professionally prepare the documentation and obtain the most favorable sale and leaseback offer. There are no specific legal regulations governing this process—funds, as professional entities, have the freedom to shape contract terms with tenants. It is standard practice to obtain several offers, and the chosen fund often engages in financing the client’s future investments, building long-term business relationships.

The next step after selecting the best offer is due diligence, a detailed analysis similar to that used when applying for a bank loan. Key elements of this stage include legal and technical audits of the property and a review of the future tenant’s financial situation. The process is finalized upon signing the property sale agreement and the lease agreement. During the lease term, companies are required to prepare standard financial reports, but sale and leaseback agreements do not impose additional covenants.

Or Maybe a Bank Loan?

Applying for a bank loan secured by real estate is one of the most traditional forms of financing and is not particularly complicated. The mature competition between banks means that their approach may differ depending on the institution, the industry, or the financing amount.

The first step is usually submitting a loan application. The form and amount of required information depend on the bank’s credit policy. Some institutions require detailed financial data from the start, while others only request basic information to be supplemented later. The bank then conducts a formal application review, carefully verifying clients—especially new ones. KYC (Know Your Client) procedures are applied to understand the industry specifics, analyze the management team, and identify the beneficial owners. Compliance and AML (Anti-Money Laundering) procedures, though necessary, extend the entire process.

After verification, the bank issues a term sheet, a preliminary decision outlining the main loan terms. Clients can negotiate these terms, although flexibility is limited when it comes to the bank’s internal regulations.

The next stage is due diligence, involving a financial analysis. Besides historical reports, detailed financial plans, multi-year cash flow forecasts, and business plans are often required. For companies that do not regularly prepare such documentation, this can pose a significant challenge or even an insurmountable barrier. Due diligence typically takes several weeks, or longer for more complex cases.

Once all necessary reports are collected, the bank’s credit committee makes the final loan decision. For smaller amounts, decisions are made at the local branch level. For larger amounts, the process is more formalized, and decisions are made by analyst teams or management.

Long-standing relationships with a single bank often speed up the loan process, which sometimes discourages companies from comparing offers from other institutions. Nevertheless, it is worth analyzing competitors’ proposals, as banks seeking new clients are often willing to offer more favorable terms.

After signing the loan agreement, the company must comply with the contract terms, including maintaining agreed-upon covenants and regularly preparing financial reports. The parameters of these covenants can significantly hinder business growth. Banks often require maintaining indicators such as DSCR and LTV. Even slight breaches of these indicators risk triggering the termination of the agreement. Banks also demand maintaining an appropriate level of debt to all lenders. Some covenants are vaguely defined, leaving room for interpretation in the bank’s favor. Even signing a loan for a small amount can hinder further rapid growth. Any industry can experience a downturn, so if continuous growth or no decline in results is required, the risk of covenant breaches is very high.

Or Maybe Classic Leaseback Leasing?

Financing through leaseback leasing shares several aspects with sale and leaseback financing. Similarities include property valuation processes, financial credibility assessments comparable to bank credit scoring, and lease terms similar to loan periods in bank financing. However, there are many important differences, some of which are significant.

In leaseback leasing, the key issue is the repayment of the obligation—called the principal. Leasing agreements include a repayment schedule effective at the moment of signing. This schedule can change shortly afterward if adverse market changes occur. The costs of leaseback leasing are mostly variable, based on WIBOR/EURIBOR rates. The variability of leasing installment amounts can surprise many business owners. In fixed installment agreements with long-term leases, initial payments primarily cover interest, with principal repayment occurring mostly in the later years. This repayment structure is similar to that of a residential mortgage. After many years, the principal amount still remains significant.

Fixed-rate leasing agreements do exist on the market, but they are typically either short-term (up to a few years) or come with very high fixed rates, eliminating the possibility of reducing the installment if interest rates fall. Leasing agreements usually last between 5 and 10 years. Leasing agreements are mostly offered by financial institutions such as banks, making these contracts formalized and not very flexible.

Applying for leaseback leasing financing from a financial institution is often similar to applying for a bank loan, involving the same banking procedures such as KYC, collateral evaluation, assessment of the leased asset, and profiling the company and management team.

Most real estate leasing agreements require an initial contribution, usually in the form of the first installment payment ranging from 10% to even 40% of the property’s value. In car leasing, some agreements require no initial payment, but cars are different types of assets—easily marketable—so financing entities take on the initial risk of non-repayment. Banks, however, are very risk-averse and require upfront contributions to protect themselves from potential losses if the property needs to be sold after the lessee becomes insolvent.

Banks acquire properties based on appraisal values and do not allow for obtaining surplus funds beyond the appraised value, as this would increase their risk. The high first installment or initial contribution secures the bank against the risk of not recovering its investment if forced to sell the repossessed property.

Banks also have strict requirements regarding the property’s condition and age. They typically require relatively new properties, often no older than five years, with good accessibility and in markets with well-developed rental activity, where finding another tenant or buyer is relatively easy.

A critical difference between leasing and rental agreements is the obligation to repurchase the property at the end of the leasing term. Leasing contracts must include buyout provisions. This obligation removes flexibility. Properties, like any other asset, depreciate over time, and after many years, the company may no longer wish to operate in an outdated building.

Leasing providers, especially banks, do not manage properties, so their condition for entering into an agreement is a mandatory buyout. There are various buyout structures. Sometimes, the property can be repurchased for a token amount (symbolically “one zloty”), but more commonly, companies negotiate a balloon buyout. To lower monthly payments, they agree to repurchase the property at a high final price.

While such agreements can be financially favorable in the short term and help manage cash flow, the buyout obligation at the end of the lease term can become problematic if the company lacks sufficient funds to complete the buyout. Lessors may refuse to extend the buyout term or agree only on much less favorable conditions. Many companies have faced this situation.

Leaseback agreements should be carefully reviewed, particularly clauses regarding contract violations and the possibility of termination. There are usually many such clauses, and even a short payment delay of just a few days can lead to lease termination, threatening the company’s operations. Vaguely defined clauses, such as those referring to significant changes, deterioration of results or prospects, or increased industry risk, provide lessors with broad interpretive leeway. Even if the lessee makes all payments on time, the lessor might terminate the agreement simply because they perceive a risk that, in the future, the lessee might struggle to meet leasing payments.

Sale and leaseback remains the only product that provides stable payment conditions throughout the entire financing period.

The INWI team has prepared a comparison of three financing methods: sale and leaseback, bank loan, and financial leasing.
The comparison assumes that the company owns real estate, generates revenues exceeding 100 million PLN, and has a positive EBITDA.