Benefits of a Sale-Leaseback For Industrial Investors 

Are you an industrial warehouse owner looking for a way to free up some capital to expand your investment portfolio? Well, there is one solution that is guaranteed to increase an investor’s profit: a sale-leaseback. 

What is a Sale-Leaseback? 

 A sale-leaseback is the process where owners sell their asset, such as an industrial warehouse property to another party at a fixed price. Then the buyer leases the industrial warehouse back to the original seller – the seller of the industrial warehouse now becomes the lessee and the buyer becomes the lessor. Typically, the original seller signs a long-term lease agreement with the buyer so the asset can continue to be used for operations. This type of transaction benefits all sides – the seller and the buyer.  

Benefits of a Sale-Leaseback for Sellers

• A sale-leaseback is extremely beneficial to the original owner or seller that chooses to participate in this process. Here are some of the main benefits: The seller of the industrial warehouse will be able to free up capital that they can now use to expand their business. 
• The seller can still maintain the industrial warehouse that they have already been occupying, allowing them to continue using assets for operations. 
• The seller of the industrial warehouse who is now the lessee can deduct the rental payments from the industrial warehouse since it will be considered a business expense, making it more appealing for their taxes. 

 What Does a Sale-Leaseback Look Like? 

The number one reason an owner should participate in a sale-leaseback of their  industrial warehouse is it allows the chance to free up capital. Once the owner frees up capital, the balance sheet looks much more appealing to investors. With the sale of the industrial warehouse, anyof the debt is repaid clearing up the liabilities side of the seller’s balance sheet.  This in turn will simplify the lessee’s debt financing process since the debt to equity ratio is more attractive. 

For example, let’s say that a building owner has a debt-equity ratio of 70/30. The owner wants to expand the business but in order to do that, capital is needed. Capital can be raised two ways:  debt financing or a sale of the industrial warehouse. The business is unlikely to get favorable debt financing terms, By completing a sale-leaseback the business can free up their debt-equity ratio and raise capital instantly from the sale. This makes the capital structure look more favorable to lenders who then can lend to the business that can now raise capital and due to the freed up balance sheet.

Benefits of a Sale-Leaseback for Buyers

A sale-leaseback can be just as beneficial for the buyer as it is for the seller. Here are some of the benefits the buyer may see: 

• By becoming the landlord, the buyer is guaranteed a long-term tenant and an instant cash flow. 
• Since the lease is guaranteed by the seller, the buyer does not have to go through the hassle of marketing the industrial property. 
• Typically, the lease given to the tenant is a triple net lease, meaning the tenant pays for all the expenses, not the owner. 

It is important that before the buyer commits to purchasing the property, they complete their due diligence to eliminate the risk associated with this type of lease transfer. Some things to check for are: 

• Ensure the real estate is of reasonable quality 
• Evaluate the tenant’s credit quality 
• Examine the outlook on the industry 

Recent Statistics of Sale-Leasebacks for Industrial Commercial Real Estate 

Explore some of the top trends for the sale-leaseback market for industrial commercial real estate:  

• For the year of 2021 there were 790 sale-leasebacks that were completed that generated a total of $24.3 billion of proceeds which is up 56% by deal count and 92% by dollar amount from 2020.  
• The industrial industry has been seen as a favorite for sale-leasebacks because in 2018 and 2019 industrial properties contributed to 42% of the overall sale-leaseback activities. 
• Over the recent years we have seen the industrial sector surging with the increased need for warehouses from the surge in ecommerce, so the demand is at an all time high. 

Who Can Benefit From a Sale-Leaseback

Sale-leasebacks do not work the same for all owners that choose to sell. The most common users of a sale-leaseback are single owner-users of the building that have high fixed costs for assets. Also, big companies perform sale-leaseback transactions. For example, the company may have bought a building and expected full occupancy but has only seen 80%. They may complete a sale-leaseback to an investor where the new owner finds tenants to occupy the other 20 percent of the building.

A sale-leaseback can be beneficial in a wide variety of ways for buyers and sellers. If you are interested in a sale-leaseback, Lumicre has qualified professionals that are experts in helping investors, owners, and potential buyers in their purchasing decisions. Please contact Lumicre if you have any questions or want to know more about sale-leasebacks.

Interested in buying or selling a property in Texas? Contact our team today!