All businesses eventually reach a point where they need additional capital to fuel growth. Traditional means of doing this include raising equity or taking on more debt. Growing in popularity, one of the more underutilized options for businesses that own their own real estate is the sale-leaseback option.
A sale-leaseback involves a business selling its real estate (land and building) used in its current business operations to a third party and immediately leasing it back from the new owner. As the tenant, you would sign a long term lease that you craft, essentially remaining in control of the operating costs of the property. The proceeds of the sale can be utilized for expansion of the business by adding more locations or product lines, reducing debt, upgrading company infrastructure or simply to buyout a partner. Smart CFOs take advantage of sale-leasebacks to utilize funds from the real estate, and re-allocate the capital into uses that provide a higher return.
Sale-leasebacks are similar to taking out a mortgage against the equity built into a property with the cap rate at sale being the interest rate. The cap rate will vary depending on the lessee’s credit, property location, and lease terms being offered. Better credit and longer lease terms equate to a lower cap rate and therefore lower cost of capital to the business owner. It is typical for corporate occupied real estate to command a 6% to 10% return.
Unlike mortgages, the business owner can pull out 100% of the property’s value. Another advantage over traditional financing is off balance sheet treatment if the leases are structured correctly. It’s also usually a better option than raising more equity due the dilution of the owner’s interest in their business that occurs in that case.
There are many instances where traditional financing is either unavailable or not desirable and the effective cost of raising equity is just not palatable. This is where a sale-leaseback is often the best avenue for raising capital.
In today’s net lease market, investor demand remains strong as it is a safe harbor for passive investments relative to other sectors of commercial real estate. CFOs that have established investment grade credit and proven commitment to their infrastructure and operational facilities lend their real estate to be prime targets for savvy net lease investors.
There are a lot of reasons to do sale-leasebacks, and we’re seeing CFOs across the nation leverage their real estate to raise capital to enhance their business. Smart CFOs partner with net lease experts to craft long term leases addressing critical provisions that allow firms to maintain operational control of their facilities. As you seek out net lease brokerage firms, discuss your options with a trusted attorney and look for experienced teams that will maximize the value of your real estate consistent with your corporate objectives.
Thanks to our friends and contributors from Calkain for their insight into sale-leasebacks to raise capital.