The Anatomy of a Sale-Leaseback
How to Pull Liquidity Out of Your Real Estate
July 17th, 2020
Owning your real estate has often been encouraged as a way to build equity and grow your own portfolio of assets.
Especially if you and your business have been around for any serious length of time… the reasoning has always been, “why pay rent for 20 years when you can pay off a mortgage?”
While some people don’t want the added responsibility of managing and maintaining a property, and although it may not always make sense to own, having assets in hand may prove to be critical for some Owner-Occupiers hit hard by the economic shutdowns.
None of us saw it coming. And there is little recourse unless you had specifically prepared and insured against this unlikely scenario… or you stashed away a pile of cash for a rainy day.
But what if you could turn your property or a portion of your portfolio into a cash injection?
This re-allocation of capital and ‘pulling’ of liquidity may just prove to be the lifeblood you need to push through the pandemic. And this is especially true if you are deciding to rightsize your operations and liquidate any surplus real estate… or if you are taking this event as a natural transition into retirement and transfer or sale of the business.
What we are describing is simply an option, a tool in the toolbox for investors and occupiers. One that, given the state of the economy, may be worth examining to find product for investors and convert assets for owner-occupiers.
So without further ado, let’s take a look at sale-leasebacks.
A sale-leaseback is a transaction where a business owner sells it’s real estate and leases it back for a fixed term on previously agreed to terms while maintaining control of the property for the continued operation of its business.
Why are Sale Leasebacks so popular?
Because performing a sale-leaseback allows owners to get an influx of cash immediately, while also potentially getting a higher return on that capital should they reinvest it into their operations.
For example: a business running a 25% profit margin can, in theory, make a larger return than simply taking the yield from a 5 CAP.
And with CAP rates compressing further and further, that gap between yield and potential margins grows bigger and bigger. Assuming the business is confident in its ability to scale the operation and maintain margins, it would be worth considering.
In addition, the securing of a mid- to long-term lease would provide certainty and hedge against short-term risks or market happenings.
Finally, the additional leverage gained from accessing the full disposition value compared to financing received on a bank’s loan-to-value ratio means that selling the asset truly does maximize cash in the bank (without being on the hook of a financial institution).
The Anatomy of a Sale-Leaseback
A Sale-Leaseback transaction should provide both short and long-term value to both parties, who may have differing objectives but are aligned in ensuring the deal goes to completion.
- Eliminate responsibility of managing and upkeep of the property
- Realize and redeploy capital more efficiently back into the business
- Maximize proceeds from the disposition
- Lock in acceptable fixed rental payments for leaseback over a longer period of time
- Secure tenancy through a mid- to long-term lease
- Acquire the property at a reasonable valuation
- Obtain favourable, long-term stream of rental income
- Invest in an asset in a desirable location, in good physical condition without any environmental issues for a long-term play
- Avoid properties with significant capital expenditure requirements
- Ensure tenant is creditworthy
We are all trying our best to stay afloat, and for many of us, our business means everything to us.
That being said, Owners of Commercial Real Estate in the Greater Toronto Area may or may not be well-positioned to push through the pandemic and its resulting shutdowns. Few, if any, of us could have predicted what happened, and it caught many of us by surprise.
The silver lining here is that the GTA is such a robust and in-demand market with a large ecosystem of Buyers and Sellers. And with our vacancy rates, rental rates, and valuations having hit all-time highs right before COVID-19 took place, there may be plenty of opportunities to find creative solutions; whether it be through rightsizing, refinancing, bridge financing, sale-leasebacks, or otherwise.
While there may exist challenges in execution, Buyers are ever more hungry for product. Local, high-net-worth developers and investors are often active in bottom-of-market conditions. And well-capitalized institutional investors and pension funds are still willing to take a look at a deal if the numbers make sense.
Finally, partial-leasebacks and right-sizing options also exist for those looking to reduce their footprint while raising some capital at the same time.
Whatever you may decide, let us know how we can help you get the solution you need to ensure you make it through.
Until next week…
Goran Brelih and his team have been servicing Investors and Occupiers of Industrial properties in Toronto Central and Toronto North markets for the past 25 years.
Goran Brelih is a Senior Vice President for Cushman & Wakefield ULC in the Greater Toronto Area.
Over the past 27 years, he has been involved in the lease or sale of approximately 25.7 million square feet of industrial space, valued in excess of $1.6 billion dollars while averaging between 40 and 50 transactions per year and achieving the highest level of sales, from the President’s Round Table to Top Ten in GTA and the National Top Ten.
Goran is currently serving as Immediate Past President of the SIOR ‐ Society of Industrial and Office Realtors, Central Canadian Chapter and on the Board of Directors of Muki Baum Accessibility Centre, a Toronto‐based NGO which provides support to children and adults with complex disabilities.
Industrial Real Estate Sales and Leasing, Investment Sales, Design-Build and Land Development
About Cushman & Wakefield ULC.
Cushman & Wakefield is a leading global real estate services firm that delivers exceptional value by putting ideas into action for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 48,000 employees in approximately 400 offices and 70 countries.
In 2017, the firm had revenue of $6.9 billion across core services of property, facilities and project management, leasing, capital markets, advisory, and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.
For more information on GTA Industrial Real Estate Market or to discuss how they can assist you with your real estate needs please contact Goran at 416-756-5456, email at email@example.com, or visit www.goranbrelih.com.
Connect with Me Here! – Goran Brelih’s Linkedin Profile: https://ca.linkedin.com/in/goranbrelih
Goran Brelih, SIOR
Senior Vice President, Broker
Cushman & Wakefield ULC, Brokerage.
Immediate Past President, SIOR – Central Canada Chapter