Your Trusted Source For Real Estate Sale-Leaseback Expertise
A real estate sale-leaseback transaction, like nearly every significant financial or real estate endeavor, has pros and cons that need to be carefully considered. Ultimately, if the sale-leaseback route is your best path forward, you want to have an experienced commercial real estate sale-leaseback broker representing your best interests. Let’s talk about the sale-leaseback process and what the unique benefits are for the owner-occupant/seller.
What Does A Sale-Leaseback Entail?
A sale-leaseback transaction allows a corporate property owner/occupant to take advantage of the property value increases seen over past several years. The owner/occupant can unlock the equity in their owned commercial real estate assets without losing control or being forced to relocate their business for a long period of time - often as long as 5 to 25 years. On its surface, the steps to complete the real estate sale-leaseback transaction are simple:
- Owner/occupant (the seller) simultaneously signs a new long-term lease when Fountainhead’s expert has identified an unrelated qualified investor (the buyer) to acquire the commercial real estate asset.
- After closing, owner/occupant (the seller) receives the commercial real estate sale proceeds and no longer pays a mortgage but becomes a rent-paying tenant.
- Investor (the buyer) becomes the landlord with all the responsibilities, obligations and rights stipulated in the lease agreement.
To further protect the owner/occupant’s (now the tenant’s) interest, sale-leaseback contracts may include a lease renewal option or occasionally the contract will include a repurchase option for owner/occupant (now the tenant) to repurchase the property.
Real Estate Sale-Leaseback Pros And Cons
A real estate sale-leaseback offers many unique advantages to the seller, however, it also includes disadvantages that are important to consider when making decisions. Let’s talk about the specifics in greater detail.
Benefits For Owner/Occupant (The Seller)
Among the most notable benefits of a real estate sale-leaseback for the seller is the conversion of commercial real estate equity into cash proceeds. The seller retains control of the property per a lease agreement, while receiving a significant cash infusion. This new capital can be more efficiently invested in operating and growing the seller’s business. Sellers will often use the cash infusion to fund an expansion (new office, industrial or retail location) or acquire a complementary business as an alternative to conventional financing. Some sellers may elect to utilize this new capital to reduce existing corporate debt. Sellers, with other more-profitable locations, may use the real estate sale-leaseback proceeds to fund tenant or capital improvements at seller’s other location(s). In general, the seller will benefit from investing the new capital in any business endeavor which has a higher return on equity (ROE) than that of the commercial real estate asset.
Additionally, a business owner that also owns and occupies commercial real estate and is considering selling the business to a larger corporate entity or business competitor will not want the commercial real estate asset to be an ‘anchor’. On occasion during merger and acquisition (M&A) discussions, a prospective business buyer may discount the value of the business if buyer intends to consolidate operations elsewhere and does not need the ‘anchor’ property.
Another unique benefit of a real estate sale-leaseback from the seller’s perspective is the flexibility it offers occupants. Debt and usury restrictions become a moot point, while also reducing the attractive nature of undervalued real estate by corporate raiders.
Disadvantages For The Seller
Presented with the many benefits a real estate sale-leaseback can offer the seller, you may be ready to make the jump. However, it is important to consider the potential disadvantages.
Depending upon sale-leaseback terms and then-current conventional mortgage financing rates, the costs associated with a real estate sale-leaseback can be higher than conventional mortgage financing. Additionally, the seller, now the tenant, will be committed to the current commercial real estate facility for the entire lease term unless the seller (now the tenant) has the right to sublease the property (which is common) or has a lease termination option.
Lastly, the seller in a real estate sale-leaseback transaction, is legally bound by the lease terms without the same flexibility offered to the owner/occupant. If the buyer later sells the asset or files bankruptcy, the lease will remain in full force and effect but the seller will not control who owns the property in the future.
Real Estate Sale-Leaseback By Professionals
There are numerous factors to consider, from day-to-day operational responsibilities and business growth expectations to alternative financing options and potential tax liability. Our real estate sale-leaseback expert can help you determine if a sale-leaseback transaction makes sense for your organization.
Contact Fountainhead Commercial today to learn more about the real estate sale-leaseback process.