Sale Leasebacks May Be Returning

With the financial markets and real estate in tumult these days, sale-leasebacks are coming back into play again. In a sale-leaseback, a business can sell real estate they own and then rent the property back from the investor/buyer under a long-term net lease, which term usually runs for 15 or 20 years plus extensions and options. However, there are some sale-leasebacks that have 10 year terms as well. Many businesses are exploring sale-leasebacks as alternatives to finding capital that is difficult to obtain on Wall Street and elsewhere. Real estate makes up a large portion of a company’s asset base. Sale-leasebacks offer an alternative source of financing. The economic climate right now is such that traditional sources of capital have become more difficult and expensive to obtain now. Many private and public companies are focusing on their asset base and cost of capital trying to figure out the best strategy for their growth and expansion.

Sale-leasebacks offer tax advantages to business owners because they can move the asset off their balance sheets. Equity can be withdrawn which frees up capital for re-investment for business expansion and growth and repayment of their debt. With tight credit markets right now and financial institutions in trouble, this is a perfect solution for many businesses. The deal can also be structured so that the business is permitted to repurchase the building at a future time if they desire. Another reason, sale-leasebacks are popular with businesses is because they can provide an exit strategy, by separating their largest asset (the real estate) from the rest of the business.

A perfect example of how sale-leasebacks are working in the marketplace is The Investment firm of W. P. Carey & Co. LLC’s (NYSE: WPC) $28 million dollar sale -leaseback financing deal with Sabre Industries, Inc. , whereby W.P. Carey & Co. LLC acquired two of Sabre’s key industrial facilities in Alvarado, Texas and Bossier City Louisiana. Chad F. Edmonson, Director of W. P. Carey & Co. LLC. stated that “With the acquisition of two of Sabre’s key facilities, we have been able to provide the funds necessary to recapitalize their balance sheet and grow their business. At a time when capital is extremely difficult to find, we are pleased to continue to partner with strong firms like Sabre by providing resources to support their ongoing growth initiatives and longer term business plans.”

If you are an investor looking to own a stable asset with steady cash flow with a single credit tenant, appreciation and reduced management responsibilities while your tenant pays for the insurance, maintenance and taxes, then a sale leaseback is the right investment opportunity for you.

Of course like everything else there are some risks associated with sale-leasebacks. You have to be careful who you do a sale-leaseback transaction with and how you structure the deal. For instance, United Rentals recently settled sale-leaseback fraud charges with the SEC. United Rentals allegedly structured their deals to inflate their profits and to immediately recognize revenue. Also, if you are an owner facing foreclosure, you never want to do a sale-leaseback. Chances are you will lose your property because your new payments will be higher than your old ones that you couldn’t afford in the first place.

In summary, a well structured sale-leaseback with a high credit rated tenant is a good investment opportunity for investors. Until the mortgage and financial crisis have settled down and credit starts flowing again, sale-leasebacks may be the best alternative for businesses to generate capital for expansion and pay down debt in this tight credit market.