Great Rewards in Balancing Sale-Leaseback Issues!

Great Rewards in Balancing Sale-Leaseback Issues!

Robert J. Pliska, CRE, CPA

Birmingham, Michigan

Recent news articles have indicated that sale-leasebacks will pick up as time goes on in today's current economic environment.   There is still significant corporate interest in sale-leasebacks as a capital generation and balance sheet management tool.    While volume of commercial real estate transactions have recently been down as recently noted by various data services such as New York City-based Real Capital Analytics, sale-leasebacks were actually accounting for a greater portion of the overall commercial property sales market.   Why so?

Sales-leasebacks can be a great financing tool in today's market!  Why have your cash locked up in real estate when it can be employed in the business which can provide a higher rate of return.  In addition, the cash can be used to expand business operations, purchase other companies when the price may be lower, retire and/or buyout partners, reconfigure bank debt, increase further borrowing capacity, improve balance sheet ratios or just keep the business going in today's economic environment.  One example of a sale-leaseback is http://sale.svn.com/schaller.

So, if that is the case, what considerations should I be aware to complete a sale-leaseback and unlock those great rewards?  Be prepared to be involved in a balancing act!   A win/win situation needs to be created between the company (tenant) and the investor (landlord).  However, as long as each side is reasonable - each side can obtain substantial benefits from the transaction.

 For one, the investor needs to feel comfortable that the company has good financial stability and can pay rent over the typically long term lease.  A company needs to show reasonably good financials or at least have a good story of its operations.  Usually a CPA or financial advisor is helpful in this discussion.  Track record, length of time in the business, net worth, sales, and financial ratios are reviewed.  On the other hand, the company needs to be insured that they still have control of the property for its business operations.  As a result, a triple net lease is typically established allowing control of the property. The tenant typically pays all the expenses of the building.  The investor collects his monthly rent without having to be involved in daily operations of the building. See  

Robert Pliska for the author's sale-leaseback opportunities and properties currently on the market.

Price setting of the real estate creates another balancing act with sale-leasebacks.  The company is a key part of this discussion - since the risk and return to an investor weighs heavily into the discussions.  Higher credit results in a lower return to the investor. Lower credit results in a higher return to the investor.  More cash from the sale can be obtained with higher credit. Other considerations include rent for similar properties in the area for this type of property and recent sales of similar types of properties.

Effectuating a sale-leaseback today, may be the answer to many cash issues of corporations.  Generating cash currently locked in real estate can result in potentially higher corporate returns, future expansions and just maintaining a cash starved business in today's economic environment.  Be prepared, though, to spend some time balancing corporate and investor issues which can result in great rewards for each side!