New Reasons for Sale-Leasebacks

If you’re not actively seeking out sale-leaseback transactions, now may be the time to start.

March 1, 2000

For property owner-users, a sale-leaseback can free up capital and may offer tax breaks. Investors in these deals can lock in returns, take ownership of a property that appreciates over the life of the lease, and use lease payments to retire the loan.

Two relatively recent developments have made sale-leaseback deals even more attractive for some companies:

  • Heightened concern over risk--A growing number of companies today are sharpening the pencil, so to speak, in all operational areas. Managers who in the past may have looked at only the big picture now demand to know every cost involved in running the business, including real estate expenses. A sale-leaseback transaction can minimize risk for the seller-lessee and provide many financial benefits: converting equity to cash, improving balance sheet and credit standing, and avoiding debt restrictions, for example.
  • Need of capital for fast growth--Many companies on a fast-track expansion program face two key concerns regarding future growth: They need money to expand, but being upstarts, they may not have the cash resources needed to fuel fast growth.

Consequently, the fast-growing companies need to free up as much cash as possible. By negotiating a sale-leaseback deal, the company removes the mortgage debt from its books, allowing it to allocate more resources to expansion.

Despite the potential advantages, sale-leaseback transactions do pose potential risks. The seller, for example, might lose the right to expand or modify the property in the future or may encounter difficulties in obtaining financing for improvements on a leasehold interest.

The seller also faces higher interest rates and potential higher-than-market rents if the market softens over the long term. The buyer will encounter higher administrative costs as well as property management expenses over the duration of ownership. Still, sale-leaseback deals are a viable alternative to ownership in today’s market, especially for companies trying to minimize risk or keep cash liquid. Brokers interested in entering the sale-leaseback arena should be cognizant of the complexities of the deals and consider the following:

  • Make sure your client understands all the financial ramifications--Without a complete picture that outlines the cost of leasing versus the cost of continued ownership, prospective sellers can’t determine whether this type of transaction makes economic sense. Likewise, prospective buyers in a sale-leaseback need to understand the financial rewards and risks of purchasing a property that comes with a single, long-term tenant.
  • Educate yourself on the subject--Attend the major national shows that serve office, retail, and industrial property users and talk to participants. Seek advice from professionals affiliated with organizations serving commercial real estate practitioners. Read trade publications and scan Web sites to stay current.
  • Learn where the opportunities are--Virtually any single-tenant commercial property user can qualify for a sale-leaseback deal. Companies that have just announced expansion plans are prime candidates because they have a great deal of capital needs and a finite amount of cash.
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