Is a Sale-leaseback Right for Your Business?
Read on to determine if your company and your real estate are the right fit for this innovative financing tool
By: W. P. Carey Editorial Team
Economic uncertainty and restricted debt markets are leading more corporate occupiers to explore alternative financing options such as sale-leasebacks to secure funds. In a sale-leaseback, a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease thereby unlocking otherwise illiquid capital to redeploy into higher growth segments of its core business.
A sale-leaseback is an innovative tool that can be especially advantageous in today’s market where debt financing may be less attractive due to rising rates, but is your company and your real estate the right fit? Read on to determine if (and when) a sale-leaseback is right for your business.
The Criteria for a Sale-leaseback
Own your real estate
The key criterion for a sale-leaseback is real estate ownership. One of the primary drivers for a company to undertake a sale-leaseback is to unlock 100% of the real estate’s value while maintaining long-term operational control of the asset. By selling your property and leasing it back, you remove a non-incoming producing, fixed asset (real estate) and unlock liquid capital to reinvest into your business.
Own the right type of real estate
While the mainstream commercial property sectors of industrial, retail and office are most common in a sale-leaseback transaction, other specialty assets like life sciences and data centers have expanded the pool of investable assets.
Make sure it's critical to your operations
Investors look for specific value-add characteristics before buying a property. For instance, it’s best if your asset is mission-critical—in other words, an essential revenue driver for your business. Potential investors will also likely consider the property’s condition and age (high-quality, modern assets with sustainable features will be more valuable), location (think proximity to transportation routes) and size. Desired size will depend on the investor and often vary by property type. Retail properties for example tend to be smaller (perhaps around 20,000 square feet), compared to an industrial asset that might be upwards of 250,000 square feet. Additional space to expand the facility is also a plus for investors. However, the criticality of the asset to your operations is often more important than the asset type or size itself.
Have a strong underlying credit story (sub-IG credits welcome!)
You’ll attract real estate investors if you have a strong underlying credit and revenue history. Due to the long length of leases typically associated with sale-leasebacks, the investor will want to be confident that you can consistently pay rent throughout the lease term.
However, this doesn’t mean your company must be investment grade. Many investors can work with sellers that are sub-investment grade so long as the underlying fundamentals of the business are solid. Institutional investors with strong underwriting capabilities will be able to evaluate all credits and assess your financial statements in order to get comfortable with pursuing a sale-leaseback deal.
Be willing to sign a long-term lease, but ask the right questions upfront
The last criterion for a sale-leaseback is that you must be willing to sign a long-term lease with the investor, typically 10-30 years.
Before signing a long-term lease, it’s important to consider some critical factors, including:
- Space requirements: Evaluate your current and future space requirements to ensure the leased property will accommodate your needs for the duration of the lease. If additional space is needed, it’s possible your sale-leaseback partner will work with you on an expansion or build-to-suit of a brand-new asset.
- Renewal options: Does the lease come with renewal options? Find out the renewal terms for which the lessor is willing to extend the lease period so that you can continue occupying the property once the initial period for the lease expires.
- Maintenance and repairs: Know who's responsible for any maintenance and repair needs of the leased commercial property. In a triple-net lease, for instance, the tenant is responsible for all insurance, taxes and maintenance expenses, which also means the tenant maintains full operational control.
By considering all the above factors, you can make an informed decision and confidently enter into a long-term lease.
When to Consider a Sale-leaseback?
While sale-leaseback financing is an excellent alternative to loans and other debt financing, it's not ideal for every company in every circumstance. Here are a few examples of when it makes sense to consider a sale-leaseback for your business.
When you need capital for growth
Sale-leasebacks are an excellent tool to unlock cash for growth initiatives, particularly for companies with limited access to traditional forms of financing. Proceeds from sale-leasebacks can be channeled to investments in new equipment, technology, personnel or additional facilities. And the best part is that a sale-leaseback enables you to raise capital without losing control of your property.
To support M&A
If you're considering an M&A transaction, you may need to raise additional capital to fund the purchase of the target company—or to pay down debt following an acquisition—which may be the case for companies and private equity firms alike.
Usually, the cost of capital for commercial real estate investors is quite competitive as a real estate investor will acquire your property at market rate, creating an immediate arbitrage between the real estate multiple and the acquired business EBITDA multiple.
To strengthen your balance sheet
A sale-leaseback can help strengthen your business’ balance sheet by shoring up much-needed cash. You can use the raised capital to pay off existing debt, boost your debt-to-equity ratio or invest in other revenue-driving areas of your business.
Remember the composition of your business’ balance sheet determines how lenders, investors and shareholders view your company's risk profile. If you have less debt, your business will be more attractive to these parties.
A sale-leaseback transaction is an excellent alternative for companies, especially during periods when traditional sources of financing are limited. When choosing a sale-leaseback partner, consider an experienced, long-term investor who can buy on an all-equity basis and who is willing to work with you throughout your lease (and beyond). W. P. Carey has been a leader in sale-leasebacks since 1973 and is well-positioned to continue helping companies unlock capital even in today’s challenging economic environment. Maximize your real estate and unlock immediate capital by contacting our team today!