by Sunny Sajnani, Senior Director

A Sale Leaseback (SLB) may look and smell like a sale, but in truth … it’s a form of off-balance-sheet financing.   An SLB is consummated when a company sells its real estate for cash and simultaneously signs a long-term lease with the buyer.  The major benefit of SLB financing is unlocking trapped capital allocated to a typically illiquid asset—single tenant real estate.  Some of the major advantages of an SLB are:

  • Provides maximum proceeds of 100% of appraised value (opposed to 60%-80% LTV in a traditional financing).
  • Unlocks corporate capital trapped in real estate for a competitive cost compared with the blended cost of both debt and equity capital.
  • Provide longer-term capital (15-25 years) than is available from traditional debt sources (3-10 years).
  • Result in off-balance-sheet treatment for generally accepted accounting principles (GAAP) purposes with no restrictive covenants (for now, assuming new FASB regulations won’t screw that up!).

Companies utilize this form of financing for a variety of reasons because the cash proceeds that are a result of an SLB usually have no limit on the expenditure (hmm….really, no limit?).   Some of the more common reasons why companies have participated in SLBs are:

  • Paydown Debt
  • Finance Operational Growth and Investment (i.e.: construct new facilities, purchase new equipment, invest in new technology, etc.)
  • Reallocate Capital into Other Business Sectors
  • Mergers and Acquisitions
  • Executive and/or Management Restructuring
  • Buy-Back Company Stock

Who are the buyers of these Sale Leaseback transactions?  A block of the buyer market is individual investors who are looking to park 1031 income.  However, the lion’s share of the buyers belong to Real Estate investment Trusts (REITs).  Just in case you don’t know, a REIT is an investment vehicle (either publically traded or non-traded) that allows John Doe to invest into commercial real estate properties.

REITs are surging after one of the worst downturns in commercial real estate in a generation.  REITs outperformed the broader equity markets again last year as mall and shopping-center REITs were among the top-performing sectors amid rising retail sales and an economic recovery.

Now be aware—just because you may own an operating business and own the real estate that you occupy, that doesn’t mean you qualify for an SLB and can free up trapped capital to go to Vegas.  Most REITs (and 1031 buyers) thoroughly review your historical financial statements and balance sheets.  They want to make sure that your business has been successful and will continue to be successful throughout the 10-, 15-, 20-, or 25-year lease term that the seller enters into.

Typically the stronger the financials, the lower the cap rate that is awarded on an SLB.  All buyers (REITs and 1031 investors alike) have different risk profiles.  Some groups enjoy the credit of Walgreens, CVS, Walmart—but they are happy with a 5 percent and 6 percent return.  There are a plethora of investors looking for middle market companies with $5mm to $150mm in revenues to enter into SLBs with, but are aiming to yield higher returns—say 8 percent to 10 percent.

With an abundance of capital on the sidelines looking to make good investments, how do you select which buyer is best to facilitate your Sale Leaseback?  Will the buyer be a REIT or Private Investor?  What is the investors underwriting criteria?  How will the investor value my real estate?  These are all excellent questions that are best answered by a financier (preferably Metropolitan Capital Advisors) that is engaged in the capital markets every day, talking to new equity investors, lenders and REITs.

The SLB marketplace is fairly efficient when it comes to pricing properties that are occupied by tenants that have an investment grade credit rating.  On the other hand, a majority of SLB properties are occupied by non-investment grade tenants.  Therefore, selecting a real estate professional who has a solid understanding of the SLB market is the best way to ensure your potential transaction is closed as quickly and efficiently as possible.

Want to learn more about a Sale-Leaseback, contact Sunny Sajnani, Senior Director.