Throughout 2022, sale-leaseback activity has continued to increase. Recent data reveal that "2021 sale-leaseback activity rebounded from a pandemic-induced slowdown in 2020 to post a few of the greatest levels tape-recorded in regards to both offer count and transaction volume. ... For the complete year 2021, 790 sale-leasebacks generated an overall of $24.3 billion of profits, up 56 percent by offer count and 92 percent by dollar volume over 2020, and almost reached the 795 offer count and $27.5 billion of volume in what was a banner 2019, the highest year on record considering that SLB Capital Advisors began tracking the market."

Moving into 2023, experts report that sale-leaseback activity shows "few signs of decreasing in the face of elevated inflation and increasing interest rates." Tenants across all industries are leveraging need to gain access to capital formerly not available. This article dives deeper into what a sale-leaseback is, the pros and cons of such a transaction, and pointers for those taking part in a sale-leaseback disposition or acquisition.

What is a sale-leaseback in industrial realty?

A sale-leaseback describes a plan whereby a business sells its realty and rents the residential or commercial property back from the buyer. The terms of the lease, consisting of the lease rate and duration, are typically negotiated previous to the sale of the property, and upon close of escrow, the seller ends up being the tenant or lessee.

Is a sale-leaseback the same thing as a capital lease?

A sale-leaseback is not to be puzzled with a capital lease, which basically represents the opposite transaction. In a capital lease, the lessor, or residential or commercial property owner, agrees to transfer the ownership rights of a residential or commercial property to the lessee, or renter, at the end of the lease term.

What is an equipment sale-leaseback?

Sometimes, tenants wish to keep their real estate and sell their devices instead via a sale-leaseback. Like a standard sale-leaseback, a devices sale-leaseback includes offering equipment and renting it back under particular terms. This type of arrangement, however, is not usually utilized by real estate investors considering that they are aiming to access the benefits of real residential or commercial property. Therefore, this article focuses just on industrial sale-leaseback transactions.

The Pros of a Sale-Leaseback

A sale-leaseback transaction is appealing to both tenants and real estate investors because it offers benefits that can help both parties even more fulfill their investment or company objectives. Here are a few of the typical reasons sale-leasebacks have actually acquired traction over the last few years.

Pros for the Seller of a Sale-Leaseback

A sale-leaseback makes it possible for tenants to remain in control of their assets while accessing the equity in their realty. Prior to the deal, most sellers determine the rate, length, alternatives, and other terms of the lease. These terms are normally beneficial to the renter and can offer long-term stability along with an enhanced capability to prepare for future changes or growth.

Following a sale-leaseback deal, the seller can settle any existing financial obligation or leverage the revenues to additional invest in the company. For those seeking to grow, a sale-leaseback can be an ideal funding service, specifically when compared to taking on extra debt. Furthermore, when a residential or commercial property sells, a lot of services can lower their debt-to-equity ratio - therefore improving their books and enabling them to access additional tax advantages. Rent is now an expenditure instead of a liability and thus becomes a reduction for tax purposes.

Pros for the Buyer of a Sale-Leaseback

Buyers in a sale-leaseback transaction are typically investor looking for stable, low-risk financial investments. Tenants tend to sign longer-term leases at market rates that consist of rental bumps based upon their industry and market. As an outcome, buyers can count on a foreseeable rate of return.

In some cases, the buyer can negotiate the lease with the tenant, which can offer specific advantages when compared to purchasing a currently occupied residential or commercial property. For example, a landlord can negotiate an absolute triple-net lease, which ultimately decreases all of the landlord's duty for the residential or commercial property. With the seller-tenant now responsible for taxes, upkeep, and residential or commercial property insurance coverage, the buyer-landlord has a near passive financial investment.

Lastly, as with other property investments, the buyer can access tax benefits, such as devaluation and tax credits. Buyers, nevertheless, must always talk about prospective tax advantages with a licensed public accounting professional (CPA).

The Cons of Sale-Leaseback

All real estate have cons, and both sellers and purchasers should consider the disadvantage of partaking in a sale-leaseback transaction. While every sale varies, here is a glimpse of some of the cons parties can expect.

Cons for the Seller of a Sale-Leaseback

The most considerable drawback for sellers is the limited timeframe they have for accessing property at a predetermined rate. At some time in the future, the lease will expire, and the tenant will need to make choices concerning the future of the business and the existing area. At this moment, varying market conditions might present certain threats for the tenant. For instance, if the lease rate is substantially listed below market lease, the tenant might need to get ready for increased costs.

To that exact same point, sellers may also be at risk of paying above-market lease during some duration of the lease term. Since the rate and terms are predetermined, the tenant does not have the ability to renegotiate lease terms in the future. This might present a danger during economic downturns, such as during the COVID-19 pandemic, when services were forced to close but had to continue paying lease.

Cons for the Buyer of a Sale-Leaseback

The risks for the purchaser in a sale-leaseback transaction are like those in other property financial investments. The purchaser has in some respects invested in business that occupies the residential or commercial property. If that service fails and defaults on the loan, the landlord may end up with an uninhabited residential or commercial property. In this circumstance, they require to lease the asset and may be needed to pay occupant improvements in order to get a certified tenant to take over the space.

Additionally, the landlord may risk losing returns due to fixed market leas. However, the landlord also has access to a more steady financial investment.

What takes place after the lease term?

All leases end, and in a sale-leaseback arrangement, the end of the term can lead to 2 situations: the occupant either restores the lease or leaves the residential or commercial property. Determining which circumstance will take place is nearly difficult due to market conditions, service success or failure, and other factors.

With all this uncertainty, company owner and financiers would be smart to consider a couple of essential things before performing a sale-leaseback contract. Most significantly, both parties need to consider the place. Tenants need to ask themselves whether the area appropriates for their existing operations and future growth. Landlords, on the other hand, ought to ask whether the location can be rented if the seller-tenant leaves the area. Both parties need to also consider traffic count, demographics, zoning, and more to determine the future expediency of the website.

Transacting in a Sale-Leaseback

Both seller-tenants and buyer-landlords must team up with a certified professional when thinking about a sale-leaseback transaction. Those who have experience can help tenants and property owners navigate lease settlements, research study possible dangers and problems, conduct market viability, and far more. Overall, a sale-leaseback plan provides mutual advantages to both the seller-tenant and buyer-landlord if structured and carried out appropriately. Due to the increased volatility and unpredictability in the international economy, sellers are progressively looking to unlock worth in their properties but also keep ownership of the residential or commercial property. Buyers are wanting to secure long-lasting, constant rental earnings and make the most of residential or commercial property gratitude. A sale-leaseback can be a win for both parties.