Sale-leasebacks Gain Ground as Flexible Capital Solution
Companies turn to flexible capital solutions as debt comes due, tariff concerns linger and capital markets tighten
With corporate debt maturing and capital market and tariff uncertainty persisting, more companies are turning to sale-leasebacks to access capital quickly, without sacrificing control of their key real estate.
“Sale-leasebacks are a unique option to provide liquidity, especially when traditional lending becomes less accessible and more expensive,” says Zachary Pasanen, managing director, investments, W. P. Carey. “Interest rates are still elevated, so companies that own their real estate are leaning into sale-leasebacks to pay off expensive debt and shore up their financial position.”
As a result, this long-standing strategy is seeing increased interest as operators across industries navigate rising debt costs, looming maturities and a cautious lending environment.
Meeting liquidity needs quickly
In a typical sale-leaseback, a company sells a property it owns and simultaneously leases it back from the buyer. This frees up capital previously tied up in real estate while allowing the company to keep operating in the same location.
“W. P. Carey is unique in that we don’t use asset-level financing,” says Pasanen. “We’re an all-equity buyer with access to multiple forms of capital, which allows us to close quickly on deals that meet our investment criteria.”
He points to a recent nine-figure deal that closed just 22 days after signing the letter of intent, highlighting the advantage of working with a buyer that has decades of broad experience and ready access to capital.
For companies looking beyond traditional debt financing, sale-leasebacks are a great option, particularly when you can find a buyer that offers speed and certainty of execution. “It allows the company to focus on their core competency, whether that’s a product or service, rather than tying up capital in real estate,” says Pasanen.
What to consider before moving forward
For companies exploring this strategy for the first time, Pasanen has a few words of advice, starting with the accounting implications.
“Talk to your accounting department beforehand to make sure you understand how the lease will be treated on the books,” says Pasanen.
From there, he says it’s about evaluating all your options. Many companies are surprised to learn that even secondary or tertiary locations can appeal to the right buyer. “We’re location agnostic,” says Pasanen. “As long as we’re acquiring mission-critical real estate with a long-term commitment from a company, we’re willing to consider a deal, irrespective of location.”
Looking ahead, companies are likely to encounter escalating expenses and more restrictive lending environments, positioning sale-leasebacks as an effective means to swiftly generate capital and align with long-term strategic goals. “With the access to capital that we have,” says Pasanen, “we really view ourselves as a leading provider of sale-leaseback financing, delivering the type of solutions operators need in order to fund their next phase of growth.”
You May Also Like:
Three Strategic Uses of Sale-leaseback Capital for CFOs
There are several reasons businesses of all sizes may choose to monetize their owned real estate through a sale-leaseback. A sale-leaseback is an effective financing tool to unlock seemingly illiquid capital that can be reinvested into a company’s core business to fund both internal and external growth. It can be a particularly useful tool when traditional debt financing is difficult to secure or available at less attractive terms. Another key benefit is that the proceeds from a sale-leaseback can be used for essentially anything – from improving a company’s cost of capital to paying off debt. This flexibility enables CFOs to allocate sale-leaseback proceeds to the areas where their business needs it most at any given time. In today’s economic environment, CFOs can strategically leverage sale-leaseback capital to address several of the biggest concerns – and opportunities – that businesses are currently facing, including M&A, inflation and capital raising. Here’s how: Finance M&A In an M&A market that remains highly competitive, sale-leasebacks can be a useful tool to give companies an edge against their peers. Sale-leasebacks are an attractive means to finance M&A by enabling companies to take advantage of the value arbitrage between their real estate valuation and EBITDA multiple. When completing a sale-leaseback concurrently with an acquisition, the proceeds can effectively “buy down” the acquisition multiple and boost returns. In addition, leveraging sale-leaseback capital enables companies to avoid many traditional debt challenges like refinancing risk and balloon payments. By pursuing a sale-leaseback now, companies can also lock in an attractive rental rate for the long-term while cap rates remain low and before interest rates rise significantly. Counteract Inflation Inflation continues to surge at its fastest pace in 40 years. In April, the Consumer Price Index continued its upward trajectory, increasing 8.3% from one year ago. While the Fed has made some efforts to fight inflation, there is still a lot to be done to get prices down to more normal and stable levels. This is bad news for businesses, who are dealing with dwindling cash flows as costs continue to rise for raw materials, manufacturing and overhead. However, savvy CFOs can leverage sale-leaseback capital to help fund initiatives to mitigate the negative impacts of sustained high inflation. Sale-leaseback capital can be invested into automation equipment, new production lines or other areas with return on capital in excess of cap rates to increase production line efficiency and maintain operating margins despite increased pressure on costs. Unlock Illiquid Capital to Fund Internal Business Growth In today’s more volatile environment, having access to capital is critical to not only expanding externally through M&A, but also to investing in existing business lines. By pursuing a sale-leaseback, CFOs can unlock liquidity on a business’s balance sheet and reinvest those proceeds back into the core business, all while maintaining long-term occupancy and operational control of the real estate. Companies can launch new products, acquire additional equipment, fund R&D and grow their market share in existing business lines. This organic growth can in turn help attract top talent, particularly in the current tight labor market.
Is a Sale-leaseback Right for Your Business?
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 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. Final thoughts 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!
Sale-leaseback 101
What is a sale-leaseback? The concept is simple. For many companies, their real estate represents a significant cash value that could be redeployed to fund their core business operations and growth strategies. Through the “sale and leaseback” model (or sale-leaseback), a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease with the new owner. In doing so, the seller extracts 100% of the property’s value and converts an otherwise illiquid asset into working capital, while maintaining full operational control of the facility. What are the benefits? There are many reasons why a company would consider monetizing its owned real estate. Sale-leasebacks offer companies an alternative to traditional bank financing. This is particularly advantageous during periods of uncertainty—as seen during COVID-19 when conventional financing was limited, especially for sub-investment grade companies. Whether a company is looking to invest in R&D, expand into a new market, fund an M&A transaction or simply de-lever, sale-leasebacks serve as a strategic capital allocation tool to fund both internal and external growth in all market conditions. Key benefits include: Immediate access to capital to reinvest in core business operations and growth initiatives with higher equity returns. We like to say that most businesses are not in the business of owning real estate. A sale-leaseback enables companies to focus on its core competencies, while capitalizing on the value arbitrage between the real estate valuation and the company’s EBITDA multiple. 100% market value realization of otherwise illiquid assets compared to the 65% to 75% of the appraised value that a typical mortgage would garner. Limited financial covenants, unlike some debt instruments, providing the seller with greater control over its operations. Alternative capital source when conventional financing is unavailable or limited. Retainment of operational control with no disruption to day-to-day operations. Potential tax benefits by deducting rental payments rather than being subject to interest limitations for traditional debt as defined by tax laws. Why now? Record level dry power, coupled with today’s low interest rate environment continue to drive investor demand for alternative investments such as real estate, pushing property values to all-time highs. These conditions make now an opportune time for sellers to maximize their proceeds and secure favorably priced, long-term capital via a sale-leaseback before interest rates rise again. In conclusion Key to the success of a sale-leaseback arrangement is finding an experienced and well-capitalized investor who can understand the unique requirements of each seller and structure the lease accordingly. When working with an investor like W. P. Carey, sellers have the added advantage of gaining a long-term partner who can support its tenants through long-term flexibility and additional capital should they wish to pursue follow-on projects such as expansions or energy retrofits as their business and real estate needs evolve.