A Sale Lease-Back Can Create New Opportunities

​Last month’s “Industrial Insight”  touched briefly on the idea that a Sale Lease-back can be a  good strategy for owner’s to consider in today’s market.  This is the strategy where the existing owner/occupant sells their property to an independent third party. Then, the parties structure a lease, whereby the seller will become the tenant and the buyer will become the landlord, allowing the seller to remain in the same building.  It has been utilized by real estate buyers and sellers for many years, and it has  advantages for both parties.  Here we will explore both sides.
 
In this month’s Industrial Insight, we highlight a recent transaction that we facilitated so that you can see if you may also benefit from this type of opportunity, either as a Seller or as a Buyer,  We will look at this strategy from three different perspectives:
 
1.  Seller’s Perspective
2.  Business’s Perspective
3.  Buyer’s Perspective
 
Let’s Begin….

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Seller’s Perspective
 
There are some opening questions that Sellers must ask themselves before they consider exploring this strategy, and we will identify those questions in a moment.  But before we do, let’s review some of the advantages and considerations this opportunity can afford to a seller.
 
A Sale-Lease-back can allow a Seller to:

• Free up capital for business expansion and growth opportunities.
• Pay down or restructure debt.
• Distribute equity gains on the building to shareholders/partners.
• Allow partners in the building to cash out and/or retire.
• In addition to the above, it allows the seller to maintain control of the building to run their business operations (See the Business’s Perspective below).

 
Something to Consider….  How Do We Determine The Building’s Value???  

To an investor, the benchmark for evaluating investments is the market capitalization rate (“CAP Rate”).  It is computed by dividing the Net Operating Income by the Current Market Value of the asset.  
Historically, an owner/user will generally pay more for a vacant property than an investor will pay for a leased investment.   However, because of the current market’s increased demand for leasable space, lease rates have increased and therefore narrowed the gap between what an owner/user and an investor would pay for a property.  Each scenario is unique and our team can underwrite your property and provide an accurate and up-to-date Opinion of Value for your  review if this is an option you are considering. 
 
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Here are the Questions for a Seller to Consider:

• How much equity/capital is currently in the property?
• Has the company invested heavily in capital improvements, machinery, office modifications, etc… that would be expensive to duplicate if the company moved?
• Can the company continue to operate in this facility for the foreseeable future?
• Could the company or ownership structure benefit from the availability of the working capital that a sale can provide?

 
We recommend that you talk with us to evaluate your unique scenario and determine if this strategy makes financial and logistical sense for you. 

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Business’ Perspective
 
Case Study:
Our team recently facilitated the sale of a ~20,000 SF industrial building in Santa Fe Springs, CA with a 7 year sale leaseback (please contact me for deal terms).  We were hired by the Seller/Occupant to find a Buyer who would purchase their property based on the market lease rate. We secured an all-cash Buyer and closed in 35 days.  For the existing company occupying the building, it was business as usual.  There was no down time in their operations, no moving expenses, no change of stationery, no capital improvements in a new building…  They continued to operate their business in the same location they have been in for the past 10 years… the only difference being that they are now tenants. 
 
As you can see, for the business, there is little to no change in operations. 

• The lease provides stability in the property for the next number of years.
• The business continues to maintain the property as before.
• There is no interruption or down time because of moving.
• Accounting and payment processing now goes to the new landlord.
• NOTE: The business must evaluate the change in cash flow for the new lease payment compared to any mortgage payment.

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Buyer’s Perspective
 
For the Buyers perspective,

• They acquire a new Net Leased investment property that is 100% leased upon close of escrow. 
• Immediate cash flow upon the close of escrow.
• There is no down time and no releasing costs. 
• The tenant knows the property well and maintains the interior and exterior of the building as if still their own.
• Great option to facilitate a 1031 exchange.

 
The trick in this type of transaction is to achieve a fair CAP Rate on the building that is determined by a market lease rate.   As a buyer, you don’t want to overpay for the property by structuring a higher than market lease rate to in turn achieve a higher CAP Rate.
 
In Conclusion:
This type of transaction can be mutually beneficial to all parties involved, and if and when structured  properly it can facilitate a profitable situation for Buyers, Sellers and the Business involved.  Please call me today to discuss your unique situation and see if this is a viable option for you.