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Fundamentals of a Sale/Leaseback

On the surface, the idea of a sale/leaseback may seem overwhelming but the main thing to keep in mind is that there are two ways a tenant can occupy a space:

  1. Company A owns the building they personally occupy.

  2. Company B is a tenant and leases the building they occupy from a landlord.

We are going to look at how a sale/leaseback works from the seller’s and the buyer’s point of view.

Seller (Company A)

Seller must first get comfortable with the idea of transitioning from a building owner to a building tenant. The seller then puts a lease in place with their company to remain in the building as a tenant. Finally, the seller is going to sell the building to an investor.

This allows the seller to benefit from the sale of the real estate and still retain occupancy at that location with no disturbance to the business, ultimately transitioning from the owner of the building to a tenant of the building.

There are three main reasons a sale/leaseback is advantageous to a property owner:

  1. The seller’s building is going to be worth more money with a quality lease in place with their own company than if they were to sell the building vacant.

  2. Gives the seller liquidity allowing them to deploy the funds as needed (i.e. purchase equipment, pay down debt, invest in R&D, etc.).

  3. The seller will have to commit to some type of lease term but will free themselves of ownership, allowing them the freedom to move, if necessary, at the end of the lease term.

Buyer (Investor)

The current market conditions and a growing economy have created a very competitive investment market, so there is a multitude of buyers looking for solid investments. When an investor buys a building with a tenant in place, they will have an investment that is producing income starting day one. Also, when the tenant is the previous owner, it provides the investor with a high level of comfort because the tenant knows the building and it is functional for them. The longer the seller has owned the building, the higher the level of comfort it provides to the buyer.

Here are two main reasons a sale/leaseback is advantageous to an investor:

  1. Income-producing from day one

  2. Tenant’s familiarity with the property provides investor with security

Some of the elements that will factor into pricing are the strength of the tenant, term of the lease, rental rate and quality of the real estate.

Our team is happy to go over these issues with you so please give us a call with any questions. Visit the link below to read the case study of a recent sale/leaseback deal we completed:

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