What Is A Sale Leaseback?

A sale leaseback is a financing tool utilized by business owners in various industries. The process occurs when an owner sells their property and signs a lease with the buyer, who then obtains the property. The previous owner then begins paying rent to the buyer.

The use of a sale leaseback has become a crucial tactic for releasing hidden value and positioning a company for future expansion. This widely used financing tool enables owner-operators to release their locked-up cash and put it to better use. This capital return is fantastic for reinvesting in the company, funding expansion and additional locations, or even paying off debt.

Major Sale Leaseback Updates

Sale leasebacks are gaining more traction given the current economic climate of hiked interest rates and rising inflation. Although some external pressures seem to be leveling down, the Fed has stated that further rate rises are still on the table for the first half of 2023. As a result, corporate lenders are warier, reducing their available leverage and tightening requirements. According to GlobeSt, in 2022, the South had the most sale leaseback transactions, with 87, followed by the West, with 72, and the Northeast had the highest dollar volume of sale leaseback deals at $1.6 billion. A significant driver for sale leaseback activity thoughot the nation for the quarter was industrial, accounting for 58 percent of transactions in the quarter.

When it comes to sale leaseback transactions, most of the time, both parties are willing to work together and conduct more realistic discussions resulting in a win-win scenario. The specifics of sale leaseback deals can be changed to satisfy the needs of both sides. This means that the seller’s desired overall value consideration can be achieved by adjusting the cap rate and rental rates simultaneously while maintaining the buyer’s initial return on the property. Additionally, due to the ongoing partnership created by this kind of transaction, some leases may be altered in reaction to market changes, as has recently been the case with recurrent interest rate increases.

Various economic benefits explain the increase in popularity seen in 2022 and 2023 for sale leasebacks.

Sale leasebacks for Healthcare

Medical offices have taken over the world of healthcare real estate. The medical office sector is one of the most resilient asset classes, making it a favorite for investors. Medical office buildings have continued to excel despite economic volatility and have exhibited a steady rise in performance since 2021. According to H2C Securties Inc., Medical office building sales volume surpassed $3.3 billion in the first quarter of 2022 and $16.8 billion since the first quarter of 2021, setting a 12-month gross sales volume record.

For healthcare properties, a sale leaseback occurs when a physician group that owns the property sells to a third party, like a private equity company or REIT. As MOBs continue to prosper, a sale leaseback deal can effectively reduce risk and enable owners to collect capital immediately; a crucial consideration as cap rates are expected to suffer due to the current lending environment.

Sale leasebacks for Industrial

The opportunity to free up capital is the main justification for an owner to take part in a sale leaseback for an industrial warehouse. Any debt that is paid off with the sale of the industrial warehouse clears the liabilities side of the seller’s balance sheet. As a result, the lessee’s debt financing process will be straightforward because the debt-to-equity ratio is more desirable. With a lower debt-to-equity ratio, the business can immediately raise funds, improving the capital structure’s appearance to lenders.

There were over 397 industrial sale leaseback transactions in the first half of 2022, a 5 percent increase compared to the same time in 2021.

Sale Leasebacks for Retail

By selling the real estate at the base of the transaction and changing their status from landlords to renters, sale leasebacks enable retailers to acquire funds without closing down outlets. On the one hand, the sale can reveal the company’s hidden value. On the other, the assumed lease adds an additional source of debt that burdens a company’s finances.

Sale leasebacks may not always be the best choice for owners or investors. Still, for some, sale leasebacks enable them to reinvest the proceeds of the sale back into their company, resulting in a significantly higher return on capital. Getting the money out of the original investment could be required if an operator wishes to add new units rapidly. A sale leaseback helps owners save costs while carrying on with their business in the location and manner they like, regardless of whether they require the funds to upgrade equipment, pay off business debt, or for various other reasons.

Takeaways

With private equity firms positioning sale leasebacks as a tool to generate higher returns, high-profile corporations are utilizing them as a financing option for expanding their business or increasing the bottom line. This year is an excellent time and economic climate to consider if a sale leaseback is suitable for your property type.