A sale-and-leaseback is typically a commercial real estate transaction in which one party, often a corporation, sells its corporate real estate assets to another party, such as an institutional investor, or a real estate investment trust (REIT), and then leases the property back at a rental rate and lease term that is acceptable to the new investor/landlord. The lease term and rental rate are based on the new investor/landlord's financing costs, the lessee's credit rating, and a market rate of return, based on the initial cash investment by the new investor/landlord. At Flatrock Commercial Real Estate Group, LLC, we have extensive experience and knowledge on how to structure a sale/lease back for our clients. In some cases, when a client owns an asset through an acquisition or merger or simply changes the goals and objectives as it relates to the ownership of corporate real estate, we can provide our clients with a comprehensive financial analysis. With the network and relationships, we have established over the years, Flatrock Commercial Real Estate Group, LLC is well equipped to assemble the right investments groups for any particular asset.
The reasons and advantages for a seller/lessee are varied, but the most common are:
- Help finance expansion of the existing business, purchase new plant equipment, or invest in new business opportunities. A sale leaseback enables a corporation to access more capital than traditional financing methods. When the real estate is sold to an outside investor, the corporation receives 100% of the value of the property. Traditional financing is limited to a loan-to-value ratio or debt-coverage-ratio.
- Help pay down debt and improve the company's balance sheet.
- Help reduce the seller/lessee's business income tax liability caused by the appreciation in value (land only) of its corporate real estate assets. In addition, the seller/lessee as a tenant can deduct all rent payments as a legitimate business expense
- Helps limit risks associated with owning real estate such as cyclical market variations.[7]
The advantages for an investor/landlord are:
- Fair return on the investment in the form of rent during the lease term, and ownership of a depreciable asset already occupied by a reliable tenant.
- Long-term, fully leased asset with a guaranteed income
For income-tax purposes, the investor/landlord can take an expense deduction for an investment in a depreciable property to allow for the recovery of the cost of the investment.
Food for Thought
How far in advance should we be thinking about a move?
Earlier than you probably think. Even if you’re not moving and just renegotiating your lease, it is critical that you give yourself enough time to make a decision. Timelines vary per project, but a good rule of thumb is to begin Phase 1 no less than 6 to 9 months before your lease expires. (Your timeframe will grow with your company—the bigger you are, the further ahead you’ll want to start planning. For our recent lease renewal for about 2,000 employees, we started asking “Should we stay or should we go?” two years prior to our lease expiration.)
Which internal stakeholders should be included in this process?
Build consensus among the executive team and senior leadership to ensure an efficient process. Making sure you have the right team onboard from the beginning is critical. If you approach your move on a unified front, employees will be confident in the final decision.
What if I can’t determine my head count but we need to make a decision?
It can be difficult to determine exact headcount, especially if you’re in growth mode, but growth metrics can help you make an educated guess. Growth metrics can vary from industry to industry but looking at trends from similar companies can help establish a baseline.
How do I know which cities or neighborhoods we should be looking in?
That depends on what you value most: Cost and economic incentive? Accessibility to transportation and major highways? An appealing sense of community? Through employee interviews, market surveys, price sensitivity analyses and other tools, you can compare each location’s resume against the feedback from your team.
Should we consider employee opinion during selection? To what degree?
An initial empoyee survey can help inform leadership about location selection, and subsequent engagement troughout the process will ensure that the space is built out to best accommodate employee needs & preferences.
How in-depth are test fits? Does the building owner provide this or do we work with outside vendors?
Both options are available. Whether working with the owner or an outside vendor, it’s very important to see how a space will lay out with test fit. Building owners often already have a mock-up of the space that they can quickly tweak to give you a sense of what’s possible. Outside vendors often provide a more detailed, high-level test fit in hopes of securing your business.
If we do relocate, what’s the best way to manage employee concerns about change?
In any type of change, you should train employees so they feel informed and prepared. But the best way to ensure a smooth transition is to make sure leadership is hearing them. That’s where HR and internal communications come in. Select change agents to prevent feedback from getting lost. And above all, communicate—regularly and throughout the process. Especially once the project is over.
