The following was written by Bradley Company's Dan Skodras, Managing Director of Corporate Consulting and Investment Sales & Acquisitions.
Over the past 20 years, sale leaseback transactions have become a compelling tool for many companies to monetize their commercial real estate for a variety of reasons. In a sale leaseback transaction, the owner-occupier of the commercial property sells the asset to an investor, and simultaneously executes a long-term lease (typically 10 – 15 years, but shorter and longer leases are also possible).
Many large corporations have pursued sale leasebacks of properties ranging from offices and headquarter locations to regional warehouses and manufacturing facilities, including the sale of individual assets as well as portfolios of multiple properties. For many of these corporations, there is no longer a rationale for owning the real estate, especially with the high values offered by investors based on the amount of capital seeking stable real estate investments. By monetizing the real estate, the corporations will earn a better return through reinvesting the sale proceeds back into their core business in comparison to the appreciation, and often depreciation, of their real estate holdings.
In addition to larger corporations, small, privately held businesses can also benefit from sale leaseback transactions. We at Bradley Company have assisted clients with such transactions in our local market area.
The value proposition for real estate investors in a sale leaseback transaction is fairly straightforward. They are seeking a stable, long-term return of their investment through a property now leased to a quality tenant (the previous owner/occupier), while retaining little or no management responsibility for the real estate. Returns for the investor are usually higher in small markets than in large markets across the country, and so we see investors from across the country and foreign investors looking at markets like Northern Indiana and Southwestern Michigan for their commercial real estate investments.
On the other hand, the benefits and objectives for the owner/occupier to engage in a sale leaseback transaction will vary. Some reasons that a sale leaseback transaction is appropriate include:
- Return on Investment -The return on investing capital in their core business is much better than investing capital in owned real estate, which may actually depreciate over time.
- Financing - As a financing tool, the owner can generate far greater proceeds at 100% of a premium value for the real estate compared to 65%-75% of a lower, vacant value for the real estate upon which a bank will lend.
- Business Succession Planning – Someone who contemplates selling their business in future years will be able to generate a much greater value by the sale of their real estate through a sale leaseback transaction now than the value they will receive for the real estate as part of a business sale in the future. Owning versus leasing the real estate will also likely have little impact on the value of the business sale, so a sale leaseback should not be a limiting factor.
- Flexibility and Risk Transfer - The owner/occupier of the real estate will achieve maximum value through the sale leaseback transaction and also maintain long-term occupancy rights through the initial lease term and future options, while transferring the risk of reduction in the property’s residual value to the new owner, and also offering flexibility to vacate the property at the end of the lease if it no longer meets the needs of the tenant. Lease terms are negotiated as part of the sale leaseback transaction, so the owner/occupier has the ability to influence the terms under which it will occupy the property as a tenant in the future.
- Premium Pricing – The sale leaseback property will sell at a significant premium to comparable non-sale leaseback properties. The long-term lease with a quality tenant adds significantly to the value of the property from the perspective of a real estate investor.
For further insight regarding Sale Leaseback transactions, feel free to contact Dan Skodras at firstname.lastname@example.org or (574) 237 - 6017.