What Is a Sale-Leaseback, and Is It Right for Me?

Commercial real estate investors are facing an interesting market in Cleveland, with interest rate increases and construction costs, many are wondering if it’s time to consider a sale-leaseback. Simon Caplan, SIOR, a partner at CRESCO Real Estate, recently sat down with Smart Business to discuss who should consider a sale-leaseback, especially in this tight industrial market.

Here, we’ll break down exactly what a sale-leaseback is, and who can benefit most from one.

What is a sale-leaseback?

At its essence, a sale-leaseback is when a company sells an asset, then leases that same asset back from the purchaser. In this way, the business owner can continue to use his asset, but no longer owns it. Need a real-life scenario? 

Let’s say XYZ Company purchases a 60,000 SF warehouse in Solon for owner/occupier use and decides to rent out 20,000 SF to a tenant while occupying the remaining 40,000 SF. If after a few years XYZ Company no longer wants to be a landlord but wants to still occupy that space, XYZ can sell that property to a purchaser, ABC Company, with a set of stipulations that allows them to continue leasing the unit.

However, there needs to be value in the sale-leaseback for ABC Company, so immediately after the asset’s sale, the arrangement details are implemented. ABC Company wants to know that they have will have ownership of a cash-flowing asset, backed by a long-term lease.

What are the benefits of a sale-leaseback?

A sale-leaseback mutually benefits both the seller and the purchaser of the property. For the seller, benefits may include:

• A longer lease that locks in expenses
• Ability to continue occupying the property
• Freed up capital which can boost inventory, buy new equipment, or upgrade their building
• Limited risks to owning an asset

For the purchaser, the benefits are usually long-term, including:

• Ownership of a cash-flowing asset that has a long-term lease
• A fair return on investment
• Stable income

Who can benefit the most from a sale-leaseback?

• Those who are nearing or contemplating retirement (especially if they don’t expect to leave the real estate to family)
• A company that could use the capital boost to reinvest back into the company

It’s important to know that sale-leasebacks don’t offer much if the seller of the business has bad credit, because the building will be more difficult to sell with a “high risk” tenant. If you’re still considering a sale-leaseback, connect with a real estate broker to discuss your options.