Displaying items by tag: sale leaseback
If your business owns and occupies its commercial real estate, you already know how challenging it can be to find a space that suits your needs. Finding the perfect space—whether it’s office, industrial, or retail—is rarely ever easy, especially when markets are experiencing low vacancies, rising property prices, and increasing construction costs. A sale-leaseback is an attractive financial arrangement for many business owners who want to maximize the value of their commercial real estate, raise capital, and reduce (or altogether eliminate) debt. And while the sale-leaseback process might seem simple on the surface, it's actually quite complex.
Many commercial property owners are unaware of a financing option that can improve their cash flow without interrupting their day-to-day business operations. This financing option is called a sale-leaseback. If you’re considering entering into this type of real estate agreement, but you’re not sure exactly what it involves, we’re here to help. Today we will be discussing everything you need to know about a sale-leaseback transaction.
If you, as a business owner, CEO, or CFO of a brick and mortar company, have been interested in ways to raise operating capital or improve your debt to equity ratio then you may have heard about sale-leaseback real estate transactions. Sale-leasebacks are a fantastic way for companies to utilize an asset it already owns and occupy the property to the fullest extent. In doing so, the company is able to create business flexibility and become more nimble in an unpredictable economic time. For instance, when not burdened by a large property mortgage, selling your business at higher price and/or recapitalizing without the need for banks or investors is achievable. If your transaction is executed correctly, sale-leasebacks can greatly benefit your business. In today’s guide, we’ll cover this type of commercial real estate transaction, in-depth, so you understand the reasons for and against this strategy.
If you own the commercial property in which your business operates, you’re probably familiar with the various opportunities available should you need more liquid capital to maintain current operations, grow, and scale your organization. Simply defined, a sale leaseback offers property owners the opportunity to sell their physical property and simultaneously lease it back from a new commercial real estate investor under a long-term lease without disrupting the business. This is a mutually beneficial transaction for both the business owner and the investor. The business owner gains an immediate working capital infusion into the business from the commercial real estate sale while the investor receives the long-term rental income from the seller-now-tenant. The transaction may sound technically complicated, so if you’re considering this kind of transaction, it’s worth finding an experienced sale leaseback broker to help you navigate the process.
Finding A Qualified Sale Leaseback Broker
The ins and outs of a sale leaseback transaction require diligent attention to detail. There are critical lease details and lease structures (e.g., Absolute NNN; NNN; NN; Modified Gross; Full Service, etc.) that can impact the commercial property valuation when completing a sale leaseback. A sale leaseback broker can provide consultative guidance to ensure those lease details and the most appropriate lease structure are well-received in the eyes of the investment market for a smooth and seamless transaction.
These kinds of brokers can offer tremendous benefits to your sale leaseback transaction. So, how do you find someone who has the understanding and qualifications to provide the support needed for a sale leaseback transaction? We’ve put together a few key characteristics to look for when hiring a commercial real estate expert for your upcoming transaction.
Their Track Record
The first thing that you want to look for when hiring a leaseback broker for your sale is the historic transactions that they’ve executed. Experience is incredibly important in the commercial real estate industry, and it can make a monumental difference in your sale leaseback transaction.
Does the broker have significant experience with, for example, office or industrial lease transactions? Does that same broker also have significant experience with commercial property sales as well as financial analysis? Speak candidly with your broker options about the experience that they have and how they’ve been successful. More importantly, don’t be afraid to ask about transactions that had some bumps in the road and how they handled those challenges.
In an ideal situation, your broker should be able to explain the advantages and disadvantages of a sale leaseback to you as well, to make sure you’re making the right decision. The personal experience of a broker is one of the most valuable assets that they can bring to your sale leaseback transaction. Make sure you take a dive deep into what specifically a broker you’re considering hiring can offer.
Areas Of Expertise
In addition to a history of success, you’ll also want to get familiar with the expertise any given sale leaseback broker may have. It’s not only the type of transactions they’ve executed the most, but also the types of businesses and properties that they work with most often. Each class of commercial property comes with its own attributes, restrictions, and regulations. It’s important that the broker you’re hiring is familiar with the specifics of the type of property you’re selling and any nuances that may go along with that sale.
Resources & Responsiveness
A decade ago, there were often pros and cons to different sized commercial real estate brokerages. As the years have progressed, technology has leveled the playing field by providing equal access to CRE resources and exposure. It’s now more important to determine if the broker that you’re considering for your sale leaseback will dedicate the time, energy and resources necessary throughout your transaction. They shouldn’t just “act” engaged to win your business in the beginning, they need to put in the effort throughout the entire process. Whether you’re looking for strategic marketing to identify and target the right investor or responsive expert consultative guidance to guide you through the process, be sure that the professional you’re considering hiring can provide everything that your business will need.
Your Trusted Sale Leaseback Broker
Your relationship with your commercial real estate broker is of the utmost importance. A commercial real estate transaction is among the highest dollar volume you’ll likely ever experience, so establishing trust with the broker you choose to work with is absolutely essential. When you’re looking for a sale leaseback broker with the expertise and resources you can count on, consider Fountainhead Commercial. Our team is well-versed in the specifics of a sale leaseback transaction and we can effectively support you through each and every step. We’ll leverage our decades of commercial real estate experience to make the most out of your sale leaseback transaction.
If you’re considering a sale leaseback as an option to access capital for the acquisition of a competitor, purchase of critical equipment, or to fund business growth, contact our Certified Commercial Investment Member (CCIM) designated broker today to schedule a consultation.
When a business needs to access capital, there are a couple of options. You can elect for traditional debt financing, dilute your equity with capital raised from additional investors or you can consider a more innovative option, such as a sale leaseback transaction (often written SLB). This transaction entails selling the commercial real estate property you own (where your business operates) to an investor on the open market then leasing it back from the investor (buyer) under a long-term NNN or Absolute NNN lease agreement without ever having to relocate your business. With the right commercial broker in your corner, a sale leaseback can be a great financing tool that helps you take the right steps forward as a business. It’s important to recognize the advantages and disadvantages of a sale leaseback before embarking on this type of business decision, though. Let’s review some of the most important pros and cons of this transaction.
The Advantages of a Sale Leaseback
There are numerous advantages of a sale leaseback transaction. Most of them are related to the financial side of the business – in particular, liquid capital is made available to your business immediately at closing. There are a number of positive reasons to consider a sale leaseback, however. Let’s dive into the key benefits.
Increase Working Capital
Access to working capital is the key advantage of a sale leaseback and what makes it such a popular decision for businesses that are looking to grow. By selling the property you own (where your business operates) and leasing it back, you can gain liquidity that was previously tied up in your real estate. This transaction, when performed correctly with the help of an experienced commercial real estate broker, gives you access to 100% of the equity you have in the property.
Maintain Control of Property & Property Expenses
A big objection to selling a commercial property that is occupied by a business is the disruption to on-going operations and loss of decision-making control. Under a sale leaseback, the business / business owner will agree to a long-term (10-year, 15-year, or 20-year) NNN lease or Absolute NNN lease which allows the business / tenant to maintain 100% control of the property. Just like when the business owner also owned the commercial property, all operating expenses, under an Absolute NNN lease structure, are still paid by the business / tenant.
Capitalize On Market Conditions – Timing Matters
Buy Low; Sell High. Early in 2020, commercial real estate investors continue to pay a premium for CRE investments compared to 10-year ago. For instance, in 2010 an office or industrial CRE investment would have sold for $1.176M based upon $100,000 in NOI (Net Operating Income is equal to Base Rent under NNN lease) due to 8.5% cap rate. In 2020, an office or industrial CRE investment will likely be sold for $362,000 more = $1.538M based upon the same NOI ($100,000) due to cap rate compression between 2010 & 2020 (6.5% cap rate) which means a higher sale price can be achieved in current market environment which is near all-time highs. A business owner that also owns the commercial real estate should strongly consider striking while the iron is hot.
Eliminate Debt Financing Costs
If business owner / property owner has a mortgage prior to considering a SLB, the rent expense under a new NNN lease will likely not significantly exceed the mortgage payment. However, if business owner took out a loan (instead of performing a SLB), they would be responsible for paying the costs, fees, and interest associated with conventional debt financing.
Moreover, a sale leaseback transaction helps you improve your debt to equity ratio and provides you with the working capital you need to achieve your short-term and long-term goals such as a Merger & Acquisition (M&A) of competitor or complementary business.
The Disadvantages of a Sale Leaseback
Now, there’s no risk-free real estate transaction. While there are many advantages that may encourage a business owner to consider a sale leaseback, it’s also important to be aware of the potential disadvantages of this particular transaction.
It’s essential to work with an experienced commercial broker so you can avoid some of the potential disadvantages of a sale leaseback. One key thing to be cognizant of is the potential tax liabilities associated with capital gains that you may be responsible for after the sale of your property. Be sure to talk to your commercial real estate broker about a 1031 Exchange to defer 100% of any capital gains taxes.
Appreciation and Depreciation
Another thing to consider when looking at the potential disadvantages of a sale leaseback is what you’re giving up by no longer owning the property. You’ll no longer be able to leverage any depreciation benefits. You’ll also be forfeiting any future appreciation which why it is important to considering a SLB when the market is more robust; not at the bottom of the market cycle.
Control Of The Property
One final potential disadvantage of a sale leaseback that you’ll want to keep in mind is that by selling your property, you may be forfeiting control of the real estate without an Absolute NNN lease structure. You’ll no longer have authority over the asset but business owner (seller) can often incorporate favorable lease terms with the investor (buyer). This distinction is what makes working with a commercial real estate broker so important when it comes to a sale leaseback transaction.
Navigating The Advantages And Disadvantages Of A Sale Leaseback
A sale leaseback transaction can be highly beneficial to a business looking to increase working capital without the confines of traditional debt financing. However, the transaction can be a complicated one to execute, which makes working with an experienced commercial real estate agent an essential part of successfully leveraging a sale leaseback.
Contact our CCIM-designated commercial broker to learn more about the advantages and disadvantages of a sale leaseback and find out if it’s the right move for your business.
An often overlooked asset for business owners is the property they own. It’s not the fact that they own something valuable that is neglected, but rather that their property can be leveraged very strategically to sell their business at a higher price point, recapitalize without investors, or any number of other possibilities that can catapult a company into another realm of growth and success. How can owning your property do all this? These various benefits can be experienced through a transaction called a sale leaseback. Let’s walk through the process of a sale leaseback transaction to give you the background you need to use this transaction to your advantage.