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). Sale-Leasebacks are not for everyone, but they can be very beneficial in many situations.
Many large corporations have pursued sale-leasebacks of properties ranging from offices and headquarters locations to regional warehouses, manufacturing facilities and retail sites, 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. Experienced Bradley advisors have assisted clients with such transactions in our local market areas.
Benefits for the Owner-Occupier Seller who becomes the tenant for the buyer:
- Return on Investment – The return on investing capital in their core business is greater than investing capital in owned real estate, which may depreciate over time.
- Financing – As a financing tool, the owner can generate greater proceeds at 100% of a premium value for the real estate compared to the percentage of a lower 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 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 can 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, while also offering flexibility to vacate at the end of the lease if the property no longer meets their needs. Lease terms are negotiated as part of the sale-leaseback transaction, so the owner/occupier can influence the terms under which it will occupy the property as a tenant.
- Premium Pricing – The sale-leaseback property will sell at a significant premium to comparable vacant/non-sale leaseback properties due to the value of a long-term lease with a quality tenant.
Benefits for the Buyer/Investor:
- Return on Investment – Having the previous owner-occupier as a stable, long-term, quality tenant allows for the investor to more confidently project cash flows and return on investment.
- Little to No Management Responsibility – Typically, the tenant was self-sufficient with their property management before selling the property in a sale-leaseback. The lease created during the sale is usually written to maintain that self-sufficiency and of the owner-occupier thereby reducing the daily management responsibility of the buyer.
Indiana saw many sale-leasebacks in the past five years of properties sold at $2.5 Million or higher. According to Real Capital Analytics, between 2017 and Q1 2021, there were 31 sale-leasebacks of retail properties across Indiana totaling over 1.04 Million square feet. In that same period, there were 10 sale-leasebacks of office properties totaling 1.22 Million square feet and 28 sale-leasebacks of industrial properties totaling 3.34 Million square feet. 2018 was the year with the most transactions in all 3 product types. In that same time, Michigan saw 31 sale-leasebacks of retail properties totaling nearly 7 million square feet, 11 sale-leasebacks of office properties totaling over 1.3 Million square feet, and 43 sale-leasebacks of industrial properties totaling over 15.3 Million square feet. There are many sale-leaseback opportunities waiting to be seized.
Contributors: Dan Skodras, Bill Drinkall, Bill Bussey, Julie Pettypool