Sale-Leaseback: Why Consider Now?

Corporate North America currently retains high levels of commercial real estate ownership despite delivering low returns when viewed in comparison to other equity investments. In the overwhelming number of instances, the re-deployment of “trapped capital” through a sale-leaseback realizes a higher return when invested in the Company’s core business focus – a point enhanced in a low interest rate environment. In recent years institutional and private equity investors have increased the equity allocations towards corporate real estate ownership.

These existing market dynamics suggest corporate real estate decision makers should give strong consideration towards a sale-leaseback of their core real estate assets while maintaining operational control of the facility through a Tenant favourable lease document.

With capitalization (cap) rates/yields at historic lows it presents an opportune time to extract maximum value through a sale-leaseback of owned facilities on 100% of the value of the corporate real estate versus 65-70% of the asset value through more traditional financing vehicles. A longer-term sale-leaseback of 10-15 years provides insulation against future market uncertainties, for example, rising interest rates, trade war tensions and political risks just to name a few.

With interest rates hovering around historic lows for a prolonged period of time, it’s only reasonable to conclude it’s not if interest rates will rise, but when they will and how quickly. As the cost of capital rises, there is corresponding upward pressure on cap rates: higher cap rates – lower sale-leaseback proceeds.

The intersection of currently low cost of capital, high demand for corporate real estate ownership and opportunity to maximize sale proceeds by offering a historically low cap rate/yield in the form of building rent presents a compelling opportunity.

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