The Allure of Sale-leaseback Deals

The practice of sale-leaseback is not new in the real estate market. Briefly defined, a real estate sale-leaseback is a deal in which the property owner-occupant sells the facility to an investor and then simultaneously signs a long-term lease, typically for 10 to 20 years, to rent the property back.

For sellers, the sale-leaseback transaction frees up the value of the real estate for other purposes such as using the proceeds to expand operations or investing in new equipment. Also, any debt associated with the property is removed from the balance sheet. In turn, sale-leaseback deals offer investors a predictable return on the purchase, in terms of rent. The value of the acquired real estate will also likely appreciate, especially for well-located properties.

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But just like any other deal, a sale-leaseback has its drawbacks. For example, sellers lose flexibility in the future use of the property sold and leased back. As tenants, they have to follow the terms and conditions of the lease contract. They may also need to move when the lease expires or face penalties when they vacate the facility earlier. For investors, there is always the possibility that the tenant will be unable to pay the rent.

Still, despite the risks, many companies and investors alike saw how the sale-leaseback strategy will benefit them in the long run. In fact, 2015 saw some firms take the sale-leaseback plunge. Sale-leasebacks were not only prominent among big retail and restaurant chains but also among smaller entities, including healthcare facilities and medical office buildings.

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And in 2016, industry observers anticipate more sale-leaseback activities. Many engines will be driving future transactions, including current financial terms that make sale-leaseback an attractive option. Capital is also flowing from all sources, especially from foreign investors.

At the end of the day, though, not all sale-leasebacks are created equal. A thorough review of the deal and how it can potential affect the financial health of both parties is essential before signing off the transaction.  

As the founder and CEO of Pacer Partners, Jon Bourbeau is familiar with the various types of real estate transactions, including sale-leaseback. Read more about real estate here.