Many businesses have taken a massive hit because of the pandemic. In the real estate market, current conditions are affecting both tenants and property owners. Tenants, many of which have seen a huge dip in income, are having difficulty paying rent. That’s put a strain on landlords, who often have lenders to pay. More important, if you are an owner/occupier, this quickly becomes a double-edged sword.
The situation has led some property owners to seek out liquidity and mitigate some of their risk. They’re finding that sale-leasebacks, which bring in investors who can provide immediate cash, often provide a logical and time-sensitive solution.
Smart Business spoke with Joseph V. Barna, SIOR, a principal at Cushman & Wakefield/CRESCO Real Estate, about sale-leasebacks and what property owners should consider as they look for investors.
Why should commercial property owners consider a sale-leaseback now?
Many property owners are looking to convert assets into liquidity, and there are a lot of qualified investors and institutions that are flush with capital looking for places to put it. Many regional and national investors are interested in Cleveland as there is less competition for deals compared to top-tier markets such as Los Angeles, New York or Chicago.
In sale-leaseback transactions, the owner sells their property to an investor, gets immediate capital to deploy elsewhere and retains use of the asset.
Property owners that also run businesses may need to invest in equipment, want to expand or need to pay down other debt, and the capital required to accomplish those things may be tied up in their property. Through a sale-leaseback, they can take the equity out and put it where they can get a higher return while getting the benefit of using and occupying the property.
What should property owners look for in an investor?
It’s important for sellers that operate out of their property to recognize that once the sale-leaseback transaction is complete, they’ll be a tenant and there’s going to be a new owner. It’s a partnership — the new owner is looking for a return on the investment and the former owner needs a property that can meet their business’s needs. Both parties need to understand the other’s objectives and long-term goals.
One consideration as sellers talk with potential investors is how experienced the investors are with this type of investment and property — how capable they are of being a landlord. For instance, if the building needs a new roof, can the investor write a check and make it happen? It really comes down to experience, how well capitalized they are, and their history.
While investors are eager to put their money to work, they’re still selective. It may be tough for retail property owners to find investors right now because this specific market sector is struggling. Also, office investments are not as hot as they had been as more people work out of their house and it’s unclear how many people are going to return to an office environment. That could be made worse if businesses downsize their office space to accommodate this potential new normal.
What might deal negotiations look like?
Investors may want the tenant to sign a long-term lease — eight or 10 years. In that case, they’ll want to make sure that the tenant is capable of being in business that long, so they will need to be comfortable with the financial stability of the business.
The tenant should have a clear understanding of their future business requirements and the trajectory of the business should be reflected in the lease. For instance, if the business is expanding, provisions should be included for the investor to renovate or expand the premises to accommodate that growth. On the flip side, the tenant might want to include contraction and/or sublease rights.
Property owners who are looking to convert their asset to cash should work to understand the current market conditions and talk with the right experts — accountant, legal and financial advisers, real estate consultant — to determine where the market is and where it’s going. That will help them make the best decision, and ensure a positive outcome despite the current challenges.
Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate