Corporate Debt Problems May Spur Sale-Leasebacks This Year

The volume of sale-leasebacks took a nosedive late last year, but given the credit environment, that can be said of most kinds of real estate transactions. However, there are hints that as the recession grinds on, companies will once again look to monetize their physical assets through sale-leasebacks, provided investors can be found with ready cash and an interest in long-term real estate holdings. In fact, the current state of the capital markets might even provide an incentive for companies to seek sale-leasebacks. “That’s because the current debt market is presenting a challenge for borrowers,” Maureen Ehrenberg, a principal with Expense Management Solutions Inc., a corporate real estate service specialist, told CPN recently following her participation in panel discussion for Commercial Real Estate Chicago Executive Women (CREW) of Chicago focusing on maximizing assets in difficult economic times. “A sale leaseback may even provide better financing terms than what’s commercially available in the market,” Ehrenberg continued. “Some companies are looking to a sale leaseback as a means to raise capital without violating their existing debt restrictions.” Dealing with debt without refinancing was definitely what the New York Times Co. had in mind when it inked a 15-year sale-leaseback in March of its Midtown Manhattan headquarters in a building completed only two years ago. Investment firm W. P. Carey gave the struggling media company $225 million for part of the space that the company owns in the building, totaling about 750,000 square feet. The newspaper, which will pay rent to stay in the space, has the option to buy it back in 10 years for $250 million, but for the moment it will use the proceeds of the deal to retire debt that is due next year. “For some companies, sale-leaseback may be the preferred–or only–method for raising capital at present,” Real Capital Analytics noted in its February Capital Trends Monthly.But are there enough qualified buyers to satisfy companies looking to sell and then lease back their assets? The answer, like the answer to many questions in this tough economy, is maybe. “A sale leaseback does pose some risks potentially to both parties, and in this market a buyer default could cause major disruption to a corporate occupier,” noted Ehrenberg. “Conversely, a seller default could present serious pain to an investor. A sale leaseback is a viable option for monetizing corporate real estate assets, but it’s a calculated risk, and both parties must do their due diligence.”