Analysis of a Sale-Leaseback

A sale-leaseback allows a company to raise money from the sale of its property while retaining its use, so a sale-leaseback opportunity typically happens when an owner occupant/tenant would rather not relocate.

When the owner-occupant company sells its building to an investor, the investor is buying the income stream that this tenant or seller would be providing. The higher the income stream, theoretically, the higher the value. But there are challenges, such as when the current owner agrees to an extremely above-market lease rate. Remember, the investor is buying this income stream, so should the seller go out of business, then the investor has the challenge of trying to release the property at an above-market lease rate – and that dog don’t hunt. That is why it is extremely important for the potential seller to understand the realistic lease rates so that they can better appreciate the investor’s point of view.

Now in a sale-leaseback, if the potential seller signs a slightly above-market lease rate, and is an extremely well-capitalized company with a good track record, the differential between the contract lease rate and the actual market lease rate may be insignificant. The length of the lease term is also important to investors.

Investors look closely at the reasoning and financial condition of the seller (now the new tenant) in order to determine the reasons for the sale. Due diligence is very important for all parties.

Sale-leasebacks can be an excellent way for an owner occupant to generate cash to pursue other opportunities like growing their core business or investing in a venture that would provide a greater return to the seller or perhaps to return capital to shareholders.

Published column on Commercial Property Executive by Randy Mason

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