What Is A Sale-Leaseback?
What is a Sale-Leaseback? A sale leaseback occurs when a company sells the land and building used in its current business operations. in other words, a Sale-Leaseback transaction allows a franchisee to sell corporately owned real estate and simultaneously lease the real estate back under a long-term lease with the buyer of the real estate. It’s a mechanism to:
- Replenish working capital
- Buy out a partner
- Rebrand/remodel existing locations
- Improve infrastructure
Sale Leaseback strategies have been successfully utilized for years by numerous industries, including retailers, pharmacy chains as well as restaurant operators. With a shortage of retail product in the marketplace, investors have become very comfortable with investing in corporate real estate assets.
Franchisee’s continually face challenges as they look to source capital. For operators that own their own real estate, now is an excellent time to consider a Sale-Leaseback. Compared to conventional debt financing, a Sale-Leaseback has many advantages and in today’s low-interest-rate environment, Sale Leasebacks offer higher yields to investors looking for alternatives to traditional fixed-income investments. Executed properly, it’s a strategic move that allows an owner to unlock the value of the real estate, while still maintaining operational control.
Why do a Sale-Leaseback?
Companies do Sale-Leasebacks for a variety of reasons, but generally, do so to use net proceeds of the transaction in order to reinvest in a corporate purpose that produces higher yields. Corporate occupied real estate typically commands a return of 6% to 10%. A company can receive a higher return from allocating its capital to other uses:
- Corporate mergers and acquisitions
- Expanding company operations
- Reducing debt
- Stock repurchases
- A Sale Leaseback is an excellent mechanism to:
- Replenish working capital or buy out a partner
- Provide capital allowing a senior stakeholder to retire and structure an orderly transition to the next generation
- Upgrade company infrastructures
- Monetize 100% of the fair market value of your real estate versus today’s 50% to 70% value limitations in mortgage financing.
- No change in operational control of the real estate
- Company controls the terms of the lease including rent, lease and renewal terms
- Excellent source of alternate financing in today’s difficult credit environment
- Advance take out for build-to-suit projects
- Typically short transaction closing process
- Enhances the company’s liquidity
- Raise inexpensive capital without giving up ownership
Why Sale Leasebacks are Attractive to the Buyer/Investor?
- The corporate real estate asset is structured as a single tenant net lease (STNL) asset. STNL assets are hands-off, easy to own assets which often appeal to investors who are concerned with the return on capital as much as capital appreciation.
- An STNL has often been called a real estate transaction wrapped in a bond. The STNL investor receives a return which is higher than a bond.
- Corporate real estate assets are often viewed as being internet resistant.
- An STNL asset is often acquired by institutional investors, high net worth individuals or section 1031 tax-deferred investors.
- The creditworthiness of the franchisee is critical to the buyer.
- Like all real estate transactions, location is important to the buyer but the buyer may rely equally as much on quality of the credit of the tenant in making its investment decision.
- The STNL marketplace is one of the more liquid segments of all real estate markets, providing the buyer with flexibility.
Planning for a Successful Sale-Leaseback
There are significant legal and marketing issues that need to be addressed when a company is assembling its Sale-Leaseback team. The right advisers ensure that the company’s value is maximized and the company’s operational interests are protected during the term of the lease which is created during the process.
As with any sale of corporate real estate, matters involving title, environmental issues, deferred maintenance, if any, as well as terms of the existing property financing will need to be reviewed. A law firm should be engaged with expertise in structuring a long-term net lease early in the process.
Selecting the right adviser to effectively market the property and navigate through the process is also critical. That’s why our Sale-Leaseback experts are here to help. Contact us at Avison Young’ Net Lease Group today to help you unlock your capital with a Sale-Leaseback.