Any business, no matter what the economic cycle or stage of growth the
company is in, is looking for ways to free up capital and increase flexibility.
“Any business that owns real estate
should evaluate a corporate sale lease-back transaction as an efficient means to
accomplish some or all of these objectives,” says Patrick Shannon, vice president of the Investment Group at Grubb &
Ellis in Detroit.
The economy is still in a state of near-recession, so investors are looking to
diversify their portfolios. Commercial real
estate is an asset class that more and
more investors have gravitated to over the
last 10 years.
“There are still far more investors in the
commercial real estate arena than there
were 10 years ago,” Shannon says. “Corporate sale leasebacks are attractive
options to real estate buyers because of
the immediate cash flow and long-term
value of real estate. Businesses, meanwhile, are open to corporate sale lease-backs because they are a commonly
accepted and economically efficient
means to raise capital.”
Smart Business talked to Shannon
about the benefits and drawbacks to a
sale leaseback agreement.
What exactly is a corporate real estate sale
leaseback?
In its simplest form, a sale leaseback is a
financial transaction whereby a company
sells its real estate to an investor, who
then leases the property back to the seller.
Typically, the leaseback term is for a period of 10 to 20 years and is structured
under a triple net lease.
How are that and other sale leaseback terms
determined?
The two most significant negotiable factors of the sale leaseback transaction are
the price and the rental rate. Factors that
influence price and rental rate include the
market rent and values, comparable sales,
the tenant’s creditworthiness and the
length of the lease term. The longer the lease term, the more the pricing becomes
influenced by the credit of the tenant. The
shorter the lease term, the more influence
market value and market rent will have on
the property.
With many variables subject to negotiation and market influence, it is important
to fully comprehend the ‘big picture’ of
the deal structure to ultimately negotiate
terms most favorable to you.
What are the benefits of a corporate sale
leaseback?
The sale leaseback turns noncore assets
into investment capital. The transaction is
essentially an alternative financing method that provides up to 100 percent of
value, whereas other financing methods
may have a threshold of less than 100 percent of value.
What are some of the drawbacks?
From the buyer’s perspective, there are
obvious risks. The tenant can choose to
leave the building, the tenant might not maintain the building to marketable standards, or the tenant might go into default
on the lease. But all of those factors are
examined before the agreement is signed,
and their risk is priced accordingly.
From a corporation’s perspective — the
seller’s perspective — one risk is that you
might grow out of the property, but owning the property wouldn’t change that. If
real estate values jump, then there could
be seller remorse. Real estate values
could go south, too, making a sale lease-back an even better strategy.
Other risks include a lease that may limit
your ability to make structural improvements and reaching the end of the
lease’s term without renewal options.
What about timing? Would it be better to do
a sale leaseback now or wait until the market
improves?
A business argument can be made for
doing it now. You want to put all your
money into the core business to yield the
largest return possible. That’s a good decision at any time. The cash proceeds from
the sale may not be as great, but the return
on your business investment might well
be better.
The current market is tending to lengthen lease terms. That gives the buyer more
stability, but if you’re looking for a longer
term anyway, such an arrangement could
serve your needs.
Experienced real estate agents can help
clients understand those factors based
upon their experience. They can judge
how the market can perceive each of
those items and reasonably estimate
expected proceeds based on various sale
leaseback terms.
PATRICK SHANNON is vice president of Grubb & Ellis Company’s Detroit Investment Group. Reach him at (248) 357-6593 or
[email protected].
