A commercial property sale-leaseback occurs when a business that owns property sells the real estate and leases it back from the buyer so that the business may continue using the real estate. Businesses do this for a variety of reasons including raising cash for operations, investing in their core businesses, and/or retirement and succession planning. Investors like to buy these properties and have an asset with a long-term, stable tenant who is going to pay to lease the property with no vacancy for a set number of years.
Some businesses use this strategy to construct the building they need, and then free up capital by selling it and signing a long-term lease to use it. Leasing has tax benefits for businesses that they would not receive if they owned the property. The expense of a lease includes the use of the land and can be fully expensed the year it is paid whereas depreciation can only be taken on a building and not the land it sits on. This means the lease will have a more positive impact on the business’ income than it would receive from owning the property. Additionally, the business can sell the real estate at a value that represents current real estate yields, or CAP rates (currently averaging 7-8%), and invest those funds in their business which may have a much higher yield (often 15-20%). For developers who do a build-to-suit, they can take their profit and development fees and sell the new building in order to free up capital to fund their next project.
Buyers are interested in single-tenant properties for their ease of management and positive cash flow. There are very few landlord responsibilities, and the leases tend to be long-term. It may be similar to buying a bond, except the yields are much higher and the payment is backed by the underlying real estate. Real estate is an excellent hedge against inflation and there is a good possibility the real estate will increase in value over the term of the lease, thereby creating an even higher long-term yield. Sale leasebacks are a great tool for sellers and can be a fantastic investment for buyers who do their due diligence. The buyer must know if the tenant is paying above or below market rates for the property. If the tenant is paying above market rates, it is very important to make sure the company is financially solid and will remain solvent throughout the term of its lease, as well as determine what the value of the building may be at the end of the lease period. If the lease rate is below the market rate, it will often mean the property will sell for less money than it would with a market-rate tenant. Additionally, there may be an upside to the buyer if the tenant moves out early.
With interest rates at recent long-term highs, we are seeing more companies looking at utilizing their existing capital instead of borrowing. If you are thinking about selling, a knowledgeable commercial real estate agent can help provide valuations and expense comparisons to help make a well-informed decision. If you are looking to invest in commercial real estate, but do not want to spend a lot of time on the management of tenants, single-tenant sale-leasebacks can be an excellent avenue to explore.