How Sale Leasebacks Can Unlock Illiquid Capital

Many companies have capital inefficiently tied up in ownership of real estate assets (warehouses, office buildings, manufacturing facilities, retail stores, etc.) that may be accreting at rates below what could be earned if the capital were freed up and put to an alternative use. Entering into a sale leaseback on some or all of those assets is an attractive way to unlock this illiquid capital.

In a sale leaseback, a company sells some or all of its real estate to a passive financial buyer (often a real estate investment trust, or REIT) that simultaneously leases the property back to the company under a long-term triple-net lease. This structure allows a company to retain full operating and financial control of the property as though it were still the owner.

Sale leasebacks are also capable of attracting excellent values for sellers, often higher than what could be realized in an outright sale. This is because the buyers are passive financial organizations that will compete aggressively to lock-in fixed returns for a lengthy term (generally 15 – 20 years plus renewals) without the worry, risk, or cost of having to re-tenant the property during that period.

Unless a company believes its properties are going to accrete at unusually high compound rates or that the sale will generate excessive tax consequences, sale leasebacks serve as a valuable financing tool.

The proceeds from sale leasebacks can be re-deployed in a variety of attractive ways:

• Paying dividends to shareholders
• Funding internal growth opportunities
• Funding capital expenditures or M&A opportunities
• Paying down debt and strengthening the balance sheet

In addition to unlocking precious capital, sale leasebacks offer the following benefits:

• They monetize 100% (or possibly more) of a property’s value as compared to a typical mortgage, where only 75% of an appraised value is generally provided
• The lease payments are fully deductible and reflect 100% of a property’s value (land and building), as compared to depreciating just the building
• They effectively represent a long-term, interest-only financing at competitive fixed rates
• They afford protection against potential downward price movements in property
• They protect against the risk of rising interest rates and their impact on property values
• For companies whose shareholders own the real estate in a separate entity and lease it to the company, they can use a sale leaseback to transition those assets to corporate property in anticipation of a future sale of the business.

Sale leasebacks can be arranged for a wide variety of assets, such as:

Office/Medical Buildings      Warehouses                             Restaurants
Continuing Care Facilities    Manufacturing Facilities       Supermarkets
Health/Fitness Centers         Retail/Convenience Stores   Pharmacies
Call Centers                             Gas Stations                             Gov’t Buildings
Education Facilities               Hotels                                        Banks
Car Dealerships                      Theaters                                    Arenas/Sports Facilities

Lastly, sale leasebacks are straightforward to arrange. Transactions can be arranged in as little as 60-90 days, depending on the availability of due diligence materials. Overall due diligence requirements are not unlike those of obtaining a term-loan, with the addition of providing property-specific details.