A Beginner's Guide to Sale-Leasebacks

When purchasing commercial real estate for your investment portfolio, it is often preferred (or required by one's lender) for the property to be leased. Some properties are offered for sale by the building's occupant who agrees to lease back the property for a pre-determined period of time as a condition of the sale. This is a called a sale-leaseback. Sale leasebacks are common for assets such as car washes and industrial properties. Legitimate reasons for selling and leasing back include:

1. the tenant wanted control of the design and construction of its facility but never wanted to own it.
2. the seller wants to take advantage of a major increase in value but doesn't want to move its business.
3. the tenant's equity in the building can be better used growing the business instead of owning the real estate.
4. the seller of the real estate has also recently sold the business and the buyer of the business doesn't want to own the real estate.

There are several benefits to purchasing a sale-leaseback: 

1. the income from the lease can pave the way to securing financing;
2. the buyer can enjoy the peace of mind of having a long-term tenant in the building;
3. in a sale-leaseback, the tenant often assumes all responsibility for maintaining the property;
4. the tenant has often occupied or built the building and is familiar with what it takes to maintain it.

There are also potential issues to properly vet before proceeding with the purchase of a sale-leaseback: 

1. is the seller selling because they are in financial distress?
2. does the seller surprise the buyer with an unfair clause in the lease? Can we navigate a solution that works for all parties?
3. when the seller becomes the tenant, are they ready to be bound by a lease, no longer in charge of their property?

Contact REC to have a detailed discussion about whether sale-leasebacks are the right tool to help you achieve your commercial real estate investing goals.