Top 10 Things to Know About Sale-Leasebacks

1. Enterprise Value
A sale-leaseback can be very beneficial to owners who are considering selling their business and want to maximize their enterprise value. When it comes to selling a business, depending on your industry, it is expected to get two to eight times your EBIDTA (earnings before interest, taxes, depreciation and amortization) as a valuation of the business. However, given the business is creditworthy and willing to sign a strong lease, a manufacturer can expect to get the equivalent of a 10-20 multiple on each dollar of rent they are willing to pay. This will significantly increase the enterprise value as opposed to selling it in one packaged deal.

2. Generate Cash
A sale-leaseback allows a manufacturer to capture the value of the industrial real estate which has been at all-time highs over the last four years. Not only can they capture this value but they also do not need to make an expensive move. The cost of moving a business can easily soar into the six figures. This money is debt free on the balance sheet and monthly payments an operating expense can be very beneficial depending on the financial status of the business. It is not uncommon for owners to use the money from a sale-leaseback to fund expanding the business or acquire other businesses, while not having to take on new debt obligations.

3. Implications
Sale-leasebacks can have some other implications that need to be considered while deciding if it is the right choice for a business. First, it can lock the business into a long-term lease commitment. This can reduce the flexibility of the business. If the real estate market keeps appreciating, that appreciation will be lost as the asset has already been sold. Additionally, a sale-leaseback could open the company to increases in tax liabilities from the sale of their real estate. Anyone considering a sale-leaseback should consult their accountants and/or estate planners to help mitigate any potential tax liability.

4. Rental Rate
The rental rate that the tenant is willing to pay generally needs to be in line with the rest of the market. If the rental rate is high compared to the normal market rents in the area, it will over inflate the sale price which can deter investors or they may not be able to underwrite the transaction.

5. Lease Term
The terms of the lease also play a very important role. Investors want to see long-term leases so they know they have guaranteed income for an extended period of time. Anything less than a five-year lease tends to scare off investors who are willing to pay higher sale prices. Investors like to see the term in the 10-15+ year range, and this will help a seller get more money for their property.

6. Lease Type
The type of lease also needs to be considered. Investors like to see a minimum of a triple net lease in which you the seller or future tenant would be responsible for property expenses including maintenance (generally excluding the structure and parking lot), lawn/snow care, real estate taxes, building insurance and the utilities. If a manufacturer is only interested in a gross, single or double net lease, this will drive down the amount a buyer would be willing to pay. Conversely, absolute net leases will help to drive up a potential sale price. In an absolute net lease, the tenant would be responsible for maintaining and replacing the entire property including the roof, parking lot and structure.

7. Tenant’s Credit
The status of the future tenant’s credit is important to investors as it determines how likely their new tenant is able to fulfill their lease commitment. This creditworthiness is a major driving factor in the cap rate an investor can pay for the building. A lower cap rate garnered by a strong tenant credit rating will increase the price the investor can pay for the building.

8. Location, Location, Location
Investors prefer buildings in dense population centers with strong labor pools. They are also going to prefer to be in a dense industrial market. In the event that a manufacturer, as the tenant, were to go out of business or move, it will be easier to backfill the property. However, there are buyers out there that specialize in rural properties but generally the cap rate will be lower and they will be looking for a longer lease term usually in the 15-20+ year range.

9. Building Condition
Building conditions are very important for owner operators to consider. If a manufacturer is considering selling on a sale-leaseback and the roof, parking lot or HVAC needs to be replaced, it will be a detriment to the potential sale price. Any investor is going to look at what it is going to cost to make those repairs/replacements, and tag on a contingency margin plus a little extra for having to do the work themselves. If a building has been built for a very special purpose or is functionally obsolete, that will also drive up the cap rate an investor would be willing to pay. This is because specialty buildings are much more difficult to re-tenant and give added risk to prospective investors. This aspect can play a major role for manufacturers who are looking to build a custom building. It is very important to consult a real estate professional to ensure that your design will serve not only your own manufacturing purposes but also not be so unique that it has no marketability when it comes time to sell or re-tenant that asset.

10. Buy Back Option
An additional option that can be worked into a sale-leaseback is an option for the owner to purchase the property back. This is used by owners who are looking for debt-free financing but do not want to lose long-term control of their real estate asset. These options are generally set with a predetermined buy-back price at certain time periods throughout the lease.