Sale / Leasebacks…Are You Kidding?

That’s right!  Listen to the real estate broker you’ve never met, who keeps calling you on the phone!  Sell your building at the bottom of the market!  Lose tons of cash and your stakeholders will understand. Yeah, right!
Since when did the commercial real estate market reverse that age old concept, so that it now reads: 

                                                     “Buy low, sell low!”?

Commercial real estate values have declined 30%, 40%, and in some cases, more.  Demand for commercial real estate by investors is at an all time low.  Debt financing is tough to come by and, because of low loan-to-value ratios and other lender requirements, commercial mortgages can be costly to a transaction.  All this makes for a horrible sale / leaseback market.

So, why sell at a time when all indications are that sellers are taking it on the chin?  Cash, that’s why!  When cash is scarce and companies are seeking to squeeze nickels from every opportunity, selling owned real estate into sale / leaseback transactions is on the minds of most financial executives.

Keep in mind that a sale / leaseback transaction is valued much differently than would be the sale of the very same building if it were vacant.  In the case of a vacant building sale, the property would be valued either on its ability to house a user’s operations or satisfy an investor’s return on investment criteria.  In the case of a sale / leaseback, which is a structured finance transaction, one of the key valuation points is the seller / future tenant’s creditworthiness and associated risk profile, and its ability to make regular, full, and uninterrupted rental payments for the duration of the lease term.  Considering that the creditworthiness of even the best companies is suspect today, in sale / leaseback transactions, investors are being very conservative and are seeking to pay purchases prices that are sufficiently low to protect them against defaulting tenants.

Given the above, since the actual cost of capital to a seller in a sale / leaseback transaction would be considerably more expensive than in other transactions, those companies seeking to sell and leaseback their properties in the current environment may be viewed as making a last ditch effort…not a good position to be in.  Of course, if other, more viable and less costly financing vehicles were still available at favorable terms, many companies wouldn’t even contemplate selling and leasing back their real estate.

So, my advice is that we work on going back to the original saying: 

                                                     “Buy low, sell HIGH!”?

However, if your company must sell and leaseback its real estate, plan, get rock solid advice, hire a qualified professional, and go slowly.

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6 Responses to “Sale / Leasebacks…Are You Kidding?”


  1. 1 Geoffrey July 29, 2009 at 8:06 pm

    Squirrels gather nuts all summer long. Businesspeople gather their nuts after the snow falls…

    • 2 realstrat August 1, 2009 at 9:00 pm

      Geoff:

      We really shouldn’t be discussing anyone’s nuts in public! 🙂 Does your comment mean to suggest that all business people wait until it’s too late? I would disagree with that. Let me know.

  2. 3 Kevin Farrell July 31, 2009 at 5:10 pm

    Although sale/leasebacks are an option even in this economy we are seeing a much more basic approach getting traction. It is plain old consolidation and then disposal of excess space. This way the company can streamline their operations, reduce operating expenses and get cash from the sale of the excess space. Granted, the sales aren’t yielding anywhere near the values we would like to see. However, it is providing a path forward when all else is stalled out.

    • 4 realstrat August 1, 2009 at 9:03 pm

      Kevin:

      “….when all else is stalled out.” I couldn’t agree more. There are times, in the absence of other viable and more profitable alternatives, when a sale / leaseback may be the best opportunity for a company, given its circumstances. Thanks for your thoughts. Keep ’em coming!

  3. 5 Christopher Macke August 2, 2009 at 4:29 pm

    Having met with many corporations re: slb’s it is my experience that the corporations who didn’t sell at the peak of the market because “… they weren’t going to give away the inevitable future increase in their cre that I was surely trying to take from them” are the ones who now likely do find the cost of a slb is less than the financing, if any, available to them today.

    • 6 realstrat August 3, 2009 at 8:51 pm

      Chris:

      Thanks for your email, you sly devil. While I appreciate your comments, In today’s economic environment, where refinancing can be costly and challenging, I’m not sure that I would entirely agree that a Sale / Leaseback is always less costly than refinancing and necessarily the right move for most companies.


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