Businesses across industries are battling a common problem – higher interest rates and tighter liquidity. Banks in particular are pulling back on loan amounts and reserving capital for existing customers. Those financing challenges are pushing more business operators to consider alternatives outside of traditional bank financing – including a sale-leaseback.
According to deals B+E is tracking, sale-leaseback activity is up about 26% on a year-over-year basis as of July 2023. That increased sale-leaseback activity is creating fresh inventory for real estate investors. For example, recent sale-leaseback listings on the B+E marketplace include a ZIPS Car Wash, an AM/PM convenience store/gas station, and a senior housing property.
So, what exactly is a sale-leaseback? Just as the name suggests, a sale-leaseback investment is where a company or business owner sells its real estate to a third party and continues to occupy the space as a tenant. These sales are common across a wide variety of industries, such as restaurants, manufacturing, and medical practices to name a few. Some retail chains use sale-leasebacks to finance development strategies and new store growth.
Typically, sale-leasebacks are structured with long-term triple net (NNN) leases that give the business operating control to continue running their business in that location. The tenant also is responsible for paying expenses, including property taxes, insurance, utilities, and routine maintenance, which creates a passive investment opportunity for real estate investors. Read more about navigating a sale-lease back here.
Operating businesses like the ability to use sale-leasebacks as a financing tool to “unlock” capital tied up in their real estate. Whereas a traditional mortgage lender is only providing a loan at 50-70% of the property value, owners can access 100% of that property value through a sale-leaseback. Business owners often reinvest that money back into their business or finance growth opportunities. In some cases, they pay down debt to improve their balance sheet. Another reason business owners choose to do a sale-leaseback is to separate the business from the real estate in advance of the sale of the business, or as part of estate or succession planning in a family business.
Sale-leasebacks and single-tenant net lease (STNL) transactions are both types of real estate investment opportunities that have a number of similarities. However, there also are some differences and nuances that investors need to understand to help navigate buying opportunities and make informed decisions.
One way to think of a sale-leaseback is as a subset within the STNL universe. In fact, it is the starting point or kick-off transaction to what is often a longer investment lifecycle within the STNL universe. A sale-leaseback is a transaction where a property owner (typically a business or company) sells the property housing its business to an investor and then immediately leases it back from the new owner. The business shifts from property owner to tenant, while the investor becomes the landlord. An STNL transaction typically involves one investor owner that is selling a property to another investor.
One of the key differences for a sale-leaseback buyer is that you have a seat at the table when the original transfer of ownership is occurring, and you have an active role in negotiating lease terms with the business owner/tenant. The underlying lease in a sale-leaseback is by no means boilerplate. Everything is negotiable, and there are different levers to pull – lease provisions and terms – that can increase or decrease the price and cash flow to the investor. For example, B+E worked on one deal recently where the seller chose to offer a 25-year lease term in order to compress the offering cap rate and ultimately increase the value offered to the buyer. Buying an existing STNL property means that lease contracts and terms are already locked in place. The buyer assumes the existing lease agreement without the need for further negotiation.
Sale-leasebacks and traditional STNL investments also share several similarities that include:
In both sale-leasebacks and traditional STNL investments, the creditworthiness and financial stability of the tenant are crucial factors to consider. A strong tenant with a solid financial profile not only ensures timely rent payments but also enhances the overall attractiveness of the investment. Conducting thorough due diligence on the tenant’s financials and industry position is essential for mitigating risk and maximizing the return on investment.
Typically, corporations considering a sale-leaseback will initiate the process by asking a broker for a Broker’s Opinion of Value, in which the broker proposes a lease structure that includes lease term, rental rate, rental escalations, any special lease or sale provisions given facility use type, and potential sales price/ gross proceeds. As with any investment decision, it is important to make sure an investment aligns with your investment goals, risk tolerance, and long-term strategy. It also is prudent to work with CRE professionals specializing in sale-leaseback and STNL investments who can provide insights and guidance on the latest market trends and pricing.
