Why Sale-Leasebacks Are Appealing to Modern Corporations

Companies seeking ways to free up inactive capital could literally be sitting on a viable solution says Scott Anderson of Cushman and Wakefield (Waterloo Region).

The Senior Vice President - who is also a broker - for the Kitchener based real estate brokerage firm suggests that, for companies operating their business from buildings they own, there is no better time than now to engage in something called a sale-leaseback.

In simple terms corporations that own real estate can sell the property to an investor and then lease the building or a portion of the building at a favorable rate. By doing so they are able to separate their business operations from their assets and benefit from receiving a sizeable influx of cash while retaining use of the property.

This is a particularly attractive factor to company owners who can deploy their capital into their business producing a higher return. This allows the business to show a stronger financial picture by moving a fixed asset off the balance sheet and replacing with cash.

“Right now is a pinnacle time to do a sale-leaseback as interest rates are extremely low, demand is high and the climate is perfect in terms of the imbalance between buyers and sellers,” Anderson explains. “Right now there are many more buyers chasing product whether it’s private individuals or money flowing in from the capital market also chasing product.”

This real estate strategy has become increasingly popular over the past decade with many private equity firms as well as individuals taking advantage of sale-leaseback transactions.

Anderson says the term of the lease can range anywhere from five to fifteen years. Most commonly they are at ten years

“Also there is going to be some uncertainty as far as the economic climate. There is a negative impact of having rising interest rates. Certainly interest rates aren’t going to go any lower so there is a very limited upside and there is a huge potential downside for any companies that would want to wait for that point in time.”

Some of the companies that Anderson has represented in sale-leasebacks don’t want to remain entangled in real estate when their primary focus is on the company (not real estate) and their economic future is unpredictable.

“The real estate doesn’t allow the Seller the freedom and the flexibility to change their operation or relocate or right size their operation at any point in time,” says Anderson. “Quite often the Seller will match their facilities to the contracts that they have. If it’s a manufacturing facility they may be receiving a five or seven year mandate and hence they will match that facility to those particular contracts. “

A sale-leaseback means they can, not only increase their capital, they can lock into a lease that matches their existing revenue stream while allowing the flexibility of relocating at a future point. There are other benefits too.

Companies that enter a sale-leaseback arrangement not only have extra cash for business expansion or to invest in the core focus of their business but they can do this without interruption of business. Furthermore, they don’t incur moving costs.

There is the added bonus of eliminating the burden of facility management which can prove costly in both time and money not to mention the risk of depreciating value as interest rates rise in the future. There are tax advantages also. Rental payments under a sale-leaseback are tax deductible against the company’s taxable income whereas only the interest portion of a mortgage payment is tax deductible.

There are several companies with experience in sale-leaseback agreements but Anderson is convinced Cushman and Wakefield is in an excellent position to handle the needs of those wishing to explore these transactions.

“We get into unique creative structures,” Anderson declares. “We have senior bankers on our team who are very experienced in the banking sectors as well as having industrial brokerage knowledge.

“We can custom tailor a lease with the terms that match their primary interest and do it at the most affordable rates. If they have some sort of ‘tenant specific’ need we can blend that in and have the ownership of the real estate actually forego the capital for those needs and in essence finance certain attributes of that facility that they need.”

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