A sale-leaseback is a transaction in which an investor buys a property that is already being owned and operated by someone else.
But instead of taking control of the property, the buyer leases it back to the seller under terms and conditions on which they both agree, with the seller becoming the buyer’s tenant.
Sale-leasebacks allow businesses to free up capital by untying cash in an asset while still retaining ownership of their business.
These transactions have been extremely successful in recent years in freeing up capital invested in real estate. Many different types of businesses have taken part in sales-leaseback transactions, including banks, retail and restaurant chains and convenience stores.
Is a sales-leaseback transaction right for my company?
Sales-leasebacks aren’t geared to any single type of business. There are a range of sale-leaseback opportunities. For example:
- Large corporations can use them to take the money and/or equity tied up in real estate and use it for day-to-day operations
- For smaller companies, selling real estate while keeping your business can maximize capital assist in expansion efforts
- National retailers are prime prospects for bundling multiple proprieties and selling a larger portfolio to an institutional investor at an appealing price, generating profits from the sale and rents that are at or below market rat
What are the benefits of sales-leaseback transactions?
Getting funds from sales-leaseback transactions offer numerous benefits to property owners.
- The chance to convert equity into cash and avoid debt restriction
- The owner can receive more capital than they would with traditional financing
- You can improve your balance sheet and your credit
- These transactions provide a steady, stable form of long-term income
- You’ll get a tenant with operating history at the location
- You can acquire an investment that won’t require much management
- The transaction offers the opportunity for tax deduction through cost recovery and mortgage interest write-off (assuming financing is in place)
Are the market conditions right for a sale-leaseback transaction?
Market conditions are typically good indicators for when to pursue a sales-leaseback transaction, although companies do pursue these deals in all economic environments.
However, single tenant net lease properties tend to require a closer look at market conditions. Demand for long-term leased real estate is steered by low interest rates and low returns made with other investment opportunities. This demand boosts market values.
Five factors to consider before a sale-leaseback transaction
Several factors can impact the value of these transactions, including:
- Rent amount – The sale price correlates to annual rent when pricing on a cap rate basis
- Strength of the tenant – The better the credit and financial rating of the seller-turned tenant, the stronger your income guarantee, making the property more attractive
- Length of the lease – Longer initial leases are more attractive to the market
- Escalating rental rates – Fixed increases in rent throughout the lease terms can provide the purchaser with added income
- Location and condition – Demographics, age, wear-and-tear and use issues can all affect the property’s val
How to maximize proceeds in a sales-leaseback transaction
In a sales-leaseback, the seller/future tenant has the power to structure the lease to suit their needs, within market constraints. Here are a few things to know:
- The pricing of a sales-leaseback is akin to that of a corporate bond.
- The longer the lease terms, the higher the sale price, because investors want to realize as much stable cash flow as possible.
- The lease will be a “net lease”. With these leases, tenants agree to pay real estate taxes, building insurance and maintenance costs as well as any feeds stipulated in the agreement.
- Rent should be based on certain business metrics, such as rent-to-sales ratio.
- Maximum sales proceeds will come from fixed rental increases during the lease
Ensuring a successful sales-leaseback transaction
Are you considering a sales-leaseback transaction? Having the right broker will ensure that the company’s value is properly utilized while also protecting the integrity of operational interests during the negotiation and throughout the lease.
With more than 25 years’ experience, the brokers at Equity Retail Brokers understand the intricacies of the evolving real estate market and can offer reliable, results-based solutions. Our investment sales brokers enjoy a strong reputation among clients and other brokers in their markets.
Contact us to learn how our brokers can protect your next real estate investment.