The Ins and Outs of Sale-leasebacks

What Is a Sale-Leaseback?

In a sale-leaseback (or sale and leaseback), a company sells its commercial real estate to an investor for cash and simultaneously enters into a long-term lease with the new property owner. In doing so, the company extracts 100% of the property's value and converts an otherwise illiquid asset into working capital, while maintaining full operational control of the facility. This is a great capital tool for companies not in the business of owning real estate, as their real estate assets represent a significant cash value that could be redeployed into higher-earning segments of their business to support growth.

What Are the Benefits?

Sale-leasebacks are an attractive capital raising tool for many companies and offer an alternative to traditional bank financing. Whether a company is looking to invest in R&D, expand into a new market, fund an M&A transaction, or simply de-lever, sale-leasebacks serve as a strategic capital allocation tool to fund both internal and external growth in all market conditions.

Key Benefits Include: 

• Immediate access to capital to reinvest in core business operations and growth initiatives with higher equity returns.
• 100% market value realization of otherwise illiquid assets compared to debt alternatives.
• Alternative capital source when conventional financing is unavailable or limited.
• Ability to retain operational control of real estate with no disruption to day-to-day operations.
• Potential to gain a long-term partner with the capital to fund future expansions, building renovations, energy retrofits and more.

Who Qualifies for a Sale-Leaseback?

There are several factors that determine whether a sale-leaseback is the right fit for a company. To be eligible, companies must meet the following criteria:

Own Their Real Estate

The first and most obvious criterion for qualification is that the company owns its real estate or have an option to purchase any existing leased space. Manufacturing facilities, corporate headquarters, retail locations, and other forms of real estate can be potential candidates for a sale-leaseback. Unlocking the value of these locations and redeploying that capital into higher yielding parts of the business is a key driver for companies pursuing sale-leasebacks.

Be Willing to Commit to Operating in the Space

While the term of the lease in a sale-leaseback can vary, most investors will want a commitment from a future tenant to occupy the space for a 10+ year term. Assets critical to a company’s operations are often good candidates for a sale-leaseback because a company is willing to sign a long-term lease for those locations. This makes it a more attractive investment for sale-leaseback investors as they have more security that the tenant will stay in the facility for the long term.

Have a Strong Credit Profile

Companies do not need to be investment-grade quality to pursue a sale-leaseback. However, some credit history is typically required so the sale-leaseback investor knows that the business can make rental payments over the course of the lease. Sub-investment-grade businesses are still eligible as long as they have a strong track record of revenue and cashflow from which to judge their creditworthiness; however, they may need to find an investor who has the underwriting capabilities to assess their business. Minimum revenue and profitability requirements will vary based firm to firm, so it’s best to ask about this upfront before engaging with any particular sale-leaseback partner.

Qualities to Look for in a Sale-leaseback Investor

When considering a sale-leaseback, finding the right buyer is critical in order to ensure a company is maximizing the value of their real estate. Here are some of the key qualities to look for in a sale-leaseback investor.

Experience

A knowledgeable investor can offer more flexibility and guide sellers through the process, creating customized deal structures to meet all of a company’s unique objectives and avoid potential pitfalls. Additionally, experienced investors can typically navigate all market cycles and offer certainty of close (some in as little as 30 days), ensuring the deal closes in a timeframe that works for the company and their fiscal requirements.

An All-Equity Buyer

When looking for a sale-leaseback partner, finding an all-equity buyer is important, particularly when dealing with timing constraints. All-equity buyers don't have to worry about third-party debt or financing contingencies, meaning there’s less likelihood of a re-trade in the late stages of negotiation. All-equity buyers can also typically close faster as they do not need to wait on approval from banks or lenders, providing a smoother process overall.

A Long-Term Real Estate Holder

Finding a long-term investor is vital. Sellers don’t want someone who is simply looking to flip a property for a quick profit. Instead, look for an investor who will remain a committed partner to you over the long run and one that can provide capital for future projects such as expansions, renovations, or energy retrofits.

Diverse Knowledge and Experience

Different industries, property types and locations require unique expertise to efficiently and effectively partner with sellers to structure a deal that address the needs of all parties. Working with an investor with experience in the company’s specific industry, property type and/or country ensures that all potential risks and opportunities are considered before entering into a sale-leaseback agreement. For example, if you are considering a cross-border, multi-country transaction it’s critical you look for an investor with local teams in those countries who speak the language and understand the local rules.

What is a Build-to-Suit?

When looking into a sale-leaseback, another term companies may encounter is a build-to-suit. In a build-to-suit, a company funds and manages the construction of a new facility or expansion of an existing one to meet the specifications of a prospective or existing tenant. Upon completion, the company enters into a long-term lease, similar to a sale-leaseback. For companies looking for a brand-new property, this is a great solution that requires no upfront capital.

The Main Benefits of Build-to-Suits Include:

• Development of a custom-built facility in a location of the company’s choice.
• No upfront capital required, enabling the company to preserve capital for its business.
• Ability to retain operational control of the facility post construction.
• Potential to gain a long-term partner with the capital to fund future expansions, building renovations, energy retrofits and more.

Conclusion

While sale-leasebacks may seem intimidating for companies who have never pursued one, working with an experienced and well-capitalized investor can make the process easy. When working with an investor like W. P. Carey, sellers can ensure they are working with a partner that can understand the unique requirements of their business while having the added option of closing in as little as 30 days and the added advantage of gaining a long-term partner who can support its tenants through flexibility and additional capital should they wish to pursue follow-on projects such as expansions or energy retrofits as their business and real estate needs evolve. In all market conditions, sale-leasebacks are a great financing tool to unlock otherwise illiquid capital that can be reinvested into a company’s business to support future growth.

Think a sale-leaseback is right for your company? Contact our team today!