Corporate real estate owners and private equity firms must do the prep work and find the right buyer to fully take advantage of both short- and long-term sale-leaseback benefits.
A “great tool in really uncertain times,” the sale-leaseback can give immediate access to capital and minimize debt market exposure during uneasy economic periods. But for many looking to utilize it, the uncertainty of whether or not a deal will be successful can be a barrier to fully exploring it.
Jason Patterson, SVP, investments at W. P. Carey, starts by recommending thorough planning and transparency and careful selection of the buyer and future landlord.
“Especially with interest rates being volatile, knowing that your counter-party—the buyer—is experienced and well-capitalized is increasingly important, and will ensure that they show up at the closing table to complete the deal that you bargained for,” he says.
Pre-Deal Prep Work
Preparation and due diligence are always key in real estate investing, and it’s no different with sale-leasebacks. The seller/future tenant must figure out in advance its economic needs and preferences, including the term, rent level and rent escalators that make sense for the business.
“Doing the pre-vetting process upfront on the big economic terms is key,” Patterson says. “Knowing the tenant has thought about and committed to the term and all the key economic points in a lease upfront makes a big difference and prevents the derailing of the process later on when a group might realize they can only do a 15-year lease versus a 20-year one.”
Being timely and transparent about potential property issues is also critical to keeping the sale-leaseback deal on track. Whether environmental concerns, title complications or a problem with an old survey, issues will come out during the due diligence process so address them early on.
Partnership Essentials: Real Estate to Relationship
To enjoy the immediate access to capital, full market-value realization, preservation of operational control and other sale-leaseback benefits, corporate real estate sellers and private equity sponsors must do the deal. That means they must find the right buyer.
“The biggest criteria in determining the best sale-leaseback partner is really access to capital and high certainty to close,” Patterson says. “That means finding a buyer who isn’t relying on a third-party financing source and doesn’t employ buying contingencies.”
And the finish line isn’t the closing table. A buyer that is experienced in the market and a responsive, reliable landlord over the ensuing long-term lease is invaluable.
“Make sure you’re choosing the right party for a long-term relationship,” says Patterson. “It’s great peace of mind knowing you have a landlord you can turn to in situations for flexibility or additional capital.”
A strong partnership born of a sale-leaseback emphasizes the relationship versus a mere transaction. One of the resulting benefits for tenants is the ability to do more “bespoke-type” agreements, according to Patterson. Perhaps there’s an existing vendor the business wants to maintain ties with or the tenant has a big project underway on site; the long-term landlord can provide a flexible structure to accommodate. W. P. Carey’s sale-leaseback business has the capital to fund future tenant expansions, build-to-suits, building renovations, energy retrofits and more after the initial deal has been completed.