In a sale-leaseback, a company sells their property to an investor who leases the building back to the company under prearranged terms. The lease is usually for a term of 5 to 20 years with renewal options. The sale provides the now-tenant with a swift infusion of capital to pay down existing debt or reinvest into its business, while the buyer/investor grows its real estate portfolio with a paying tenant in tow.
Typically, the company enters into a triple-net lease whereby it is responsible for costs of maintenance and all upkeep, real estate taxes and insurance. The rent paid by the company is based upon a combination of market rents, credit of the company, the buyer’s financing cost and required return on equity. A sale-lease back is an alternative for all property types including office buildings, warehouses, manufacturing plants and retail stores.
Advantages of a sale-leaseback transaction for a company include:
1. Unlocking capital from a non-performing asset to invest in core business at a greater rate of return or to reduce debt;
2. Improving their balance sheet by removing depreciation and mortgage debt;
3. Generating more capital (100% of market value) than typical mortgage financing;
4. Continuing to have operational control of the property;
5. Determining to a considerable extent their own sale price, lease rate and renewal options.
A sale-leaseback is an attractive alternative in both good and bad economic times. The ongoing pandemic is severely affecting many businesses’ revenue, working capital is limited, lending guidelines are more stringent than in prior years and M&A activity likely will increase.
In addition, interest rates are low. These conditions represent a strong environment for sale-leasebacks. In a good economy, a sale-leaseback generates more capital than traditional mortgage financing. In a bad economy, a sale-leaseback of real estate holdings provides capital when companies are unable to obtain bank financing or raise capital through public offerings.
A misconception that many people have about a sale-leaseback is that the company has no control over the property. However, remember that the lease is long-term and typically renewal options can be negotiated to provide further control for the company.
In addition, in some respects a company has more control by leasing rather than owning because it has more options upon the lease expiration. These include exercising a pre-negotiated renewal option, negotiating a renewal based upon current market conditions, or relocating to a new facility that better accommodates the operation at that time. As an example, for a warehousing operation this could mean relocating to a larger facility, smaller facility or a different geographic area that better accommodates current distribution requirements.
Sale-leasebacks are not just an option for public companies. Private companies that are looking for ways to generate capital to invest in equipment or reduce debt should consider the advantages of the sale-leaseback transaction. In addition, private equity firms that have purchased a company or taken it private often will consider a sale-leaseback to generate funds for the purchase.
Another twist to a typical sale-leaseback is a partial sale-leaseback. Assuming that the property can be economically modified for multi-tenant use, this option allows a company to downsize in their existing facility while still generating capital to be redeployed as needed.
If considering a sale-leaseback, the first step is to engage the services of a commercial real estate professional that specializes in this type of investment transaction. This will allow you to evaluate your various options and potential market value of the real estate. Your accountant and legal counsel should also be involved in evaluating the advantages and disadvantages of this type of transaction based upon your company’s particular situation.
The next step is implementation of a professional marketing plan to position the offering and present it to the likely buyers of the particular type of real estate. Depending upon the type of property and credit of the seller/tenant, potential buyers can include real estate investment trusts (REITs) which specialize in triple net leases, national private equity funds that focus on sale-leasebacks and individual investors.
Consider the advantages of a sale-leaseback transaction for your company.
Michael L. VanBuskirk, SIOR, CCIM, CRE is executive managing director-principal at Newmark Zimmer with over 26 years of experience in investment sales/acquisitions, corporate services, development and real estate consulting. VanBuskirk can be reached at 816-512-1010 or mvanbuskirk@ngzimmer.com.
Christopher S. Robertson, CCIM is senior managing director of investment Ssles and capital markets at Newmark Zimmer. He has over 7 years of experience in investment sales/acquisitions, appraisal, financial analysis and real estate consulting. Chris can be reached at 816-512-1014 or crobertson@ngzimmer.com.
