Sale-Leasebacks Gain Popularity
- Feb 19, 2014
As part of the Federal Reserve’s efforts to keep inflation under control, interest rates are expected to rise over the next couple of years. The anticipated effect on the sale-leaseback market will be an increase in activity.The seller’s purpose in a sale-leaseback transaction is to tap into his equity, while still retaining use and control of the property. An owner with a property worth $10 million, who needs $6 million for a business expansion, can raise that money by taking out a 60 percent mortgage. However by utilizing a sale-leaseback, the property owner will retain use and control of the building and have access to the entire $10 million. With a strong credit rating and the ability to structure a long-term lease at the high-end of the current rent spectrum for that property type, it may be possible to exceed the $10 million equity.
American Forest Products, which provides wood products to Home Depot and other retailers, recently engaged Stan Johnson Co. to develop a sale-leaseback deal. As the economy picked up, Home Depot increased its orders requiring AFP to expand its credit revolvers to meet the new demand, but it did not have the necessary capital to do so. AFP was a prime candidate for a sale-leaseback transaction.
This deal required some marketing, of course. Because AFP is a small, private company, it was vital to tell the company’s story in appropriate detail. A strong lease structure would ensure appeal in the marketplace with low risk to the seller. AFP sold five light manufacturing and distribution facilities and leased them back under a 20-one-year absolute net lease removing debt from the books, increasing corporate net worth, expanding capacity, creating jobs, and improving its relationship with a prime customer.
Sale-leaseback is also a useful tool to settle the division of a property with multiple owners and users. New York City-based Park Avenue Radiologists owned a medical office condominium on Manhattan’s East Side. After a partnership split, the remaining physician owners needed to buy out former partners. A 20-year sale-leaseback to a private fund generated the capital to restructure and grow new business initiatives.
Sale-leasebacks are attractive deals for investors, too. They are usually fairly low-return investments, but also very low-risk while providing a much better return than CDs or the money market. Sale-leasebacks are usually inexpensive transactions, often cheaper than refinancing. Almost any single-tenant property would be suitable for a sale-leaseback. Stan Johnson Co. has brokered these deals for Walgreen’s and other chain retailers, for hospitals, lumber companies, and logistics companies. Our job is to structure the transaction, from lease terms to sales terms, and find a buyer.
In today’s market—with its acute shortage of quality single-tenant property for sale—the seller is very much in the driver’s seat.