Sale-leaseback transactions hold considerable appeal for both retailers and investors. They are effective tools for the reallocation of precious capital. A sale-leaseback transaction occurs when a buyer purchases a property and leases the property back to the seller at agreed-upon lease terms.
Sale-leaseback transactions allow retailers to monetize their real estate assets and redeploy capital back into their core business. Particularly for below-investment grade companies, it is an attractive alternative financing option. For the retailer it is also a mechanism to transfer downstream valuation risk while securing maximum value and occupancy rights from a long term lease. The gains realized from the sale will likely prop up the retailer’s income statement and balance sheet. Most sale-leaseback transactions trade for a premium relative to like kind non-sale-leaseback properties. And currently, rental payments from the new lease are 100% tax deductible versus only the interest portion of any mortgage financing.
For the investor, the steady and safe returns of a sale-leaseback transaction are attractive. And because a fresh lease is in place from the inception of the transaction, there is less risk of tenant default. The transaction will likely hedge against inflation depending on the lease term and escalations. The new owner now has the opportunity to capture any appreciation in the real estate. A sale-leaseback transaction also has lower management costs and risks as operating expenses and vacancies are lessened due to the longer term tenancy. As a result premium pricing on such assets is more easily justified.
While there are many advantages to sale-leaseback transactions there are some risks to consider. Your company may come under increased scrutiny after undertaking the transaction. Changes in tax laws and or accounting rules may impact how a sale-leaseback transaction is treated on a company’s income statement and balance sheet. And a shift in strategy may occur that would have made it more desirable to hold the asset without the flexibility or other limitations inherent in a long-term lease.
Although the reasons for considering a sale-leaseback are numerous and often attractive, the execution can be complicated. That’s where SRS’ sale-leaseback experts can help. From one store to a portfolio of hundreds, SRS works side by side with clients to unleash capital, reduce occupancy costs or create an exit strategy for specific retail assets, all while simplifying the process every step of the way. Our investment professionals gain a deep understanding of each client’s unique corporate objectives and work tirelessly to analyze current market data and produce viable options. SRS responds to ensure a quick and accurate closing so clients can get back to business with additional cash in its coffers.