Sale Leaseback: Weighing the Risks and Rewards For Your Business

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By: Jon Vanderplough, Vice President, Jones Lang LaSalle

In the ongoing pursuit to achieve maximum real estate performance at minimum costs, real estate executives are taking a fresh look at a long-established option: the sale leaseback or “sale and leaseback.” This means that businesses sell some—or all—of their owned properties and lease all—or a portion—of the space back.

With capital rates low, and interest rates very low, lenders are increasing available funds and commercial property transactions are picking up in most major markets, including across Ohio, Michigan and Pennsylvania. The question becomes, should your business consider a sale leaseback?

Pros and Cons of a Sale Leaseback

The benefits of a sale leaseback to the owner/seller/lessee include:

  • Quickly raising capital: A sale leaseback is one of the quickest ways to raise money yet still retain a property for your operational needs.
  • Creating a more attractive sales offering than a vacant building:  On average, final prices are higher for sale leasebacks than for traditional vacant sales.
  • Unlocking “hidden” equity on your organization’s balance sheet.
  • Right-sizing your portfolio.
  • Alleviating risks associated with property ownership.

However, certain conditions may lead to drawbacks:

  • The facility is absolutely critical to your operation, and difficult to replace (ex. a core manufacturing facility designed for your unique needs).
  • The property has a physical or geographic challenge to receiving an optimum price.
  • Overall market conditions aren’t favorable (ex. a considerable amount of comparable properties on the market, or a shortage of motivated buyers).

Every sale leaseback is unique, as so should you approach the opportunity for your organization.

The following are major considerations when contemplating this transaction, and plotting your lease structure for maximum results.

Prioritizing Financial Return vs. Flexibility

Top price and maximum flexibility directly affect each other in a sale leaseback. The more space you are willing to lease back, and the longer the lease term, the more a buyer is motivated to increase his offering price.

Depending on the asset and the location, sellers generally need to lease back a property for at least 10-15 years to obtain favorable pricing.

Your bargaining clout increases if you’re willing to lease back the entire space, relieving the new owner of having to seek additional tenants.

Early in the process, consult closely with the stakeholders in your organization to determine optimal metrics, along with your “worst-case” acceptable metrics.

Your Lease Structure And Terms

There are plenty of options when it comes to lease structures for your sale leaseback, including:

  • Gross Lease: You’re responsible for nothing but monthly rent, and the new owner generally pays all additional costs ranging from utilities, to maintenance and insurance.
  • Net Lease: You pay the cost of some, or all, variables including maintenance, taxes and insurance.
  • Bondable Lease: This binds you to pay full rent for your lease term even if the building is uninhabitable following a casualty, or is otherwise condemned property, or resold by the buyer.

Keep in mind: the greater your responsibility under the lease, the higher the sale price you will likely receive. You need to weigh the risks and rewards to fuel your negotiations.

Also, consider terms that enhance flexibility such as automatic renewal options, expansion and contraction options, rental rate guarantees, or a right of offer/refusal if the property is resold by the buyer.

The Impact on The Affected Business Unit

Without proper evaluation and negotiation, your sale leaseback can negatively impact productivity. Sit down with appropriate business unit leaders to determine exactly what must remain in place for the arrangement to be non-disruptive to operations, and insist that these conditions are met as part of the deal.

No One-Size-Fits-All

Remember, there is no set standard for these transactions. You need to carefully evaluate your organization’s financial and operational goals, and negotiate a deal that best aligns with them.

In addition, timing is key if your organization intends to invest the sale proceeds in financial markets or new property. Strive to achieve maximum value from your capital gain by studying conditions rigorously to make sure the conditions will be best when you enter the market.

For more information, download our whitepaper on Sale Leasebacks.

JLL WP download

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As vice president, Jon’s responsibilities span all industry needs including strategic planning, analytical decision support and transactional services. View Jon’s full bio to read up on his experience.

 

Photo Source: Flickr Creative Commons