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Funding for growth, refinancing corporate debt, and merger and acquisition activities are top priorities for many private equity firms. A recent PwC report noted that 60% of CEOs plan to make at least one acquisition in the next three years. The report further explains that lower levels of M&A activity during 2023 created “pent-up buyer demand” moving into the current year. However, tapping into capital isn’t always easy when it is locked in assets.

“It’s quite inefficient for private equity firms to have capital tied up in real estate assets that aren’t earning for them,” says Tyler Swann, managing director, investments at W. P. Carey. “An alternative is doing a sale-leaseback, which provides a much lower cost of accessing capital than traditional financing methods.”

Understanding sale-leasebacks and their advantages can help private equity firms strategically manage growth funding, debt maturities and other capital needs.


The Advantages of Sale-Leasebacks

With traditional financing strategies such as mortgages, terms are often shorter and exposed to higher market volatility. Accessing capital can also be time-consuming, a challenge for firms that need to move quickly for acquisition deals. That’s not the case with sale-leasebacks, notes Swann.

“Sale-leasebacks are very flexible,” says Swann. “The processing time can be as short as 30 to 45 days between the initial call and the actual funding. It’s not unusual for us to get a call from a private equity firm saying, ‘We’re closing on a business in 30 days; can you be there to close with us as acquisition financing?’ And that’s something we can do.”

He explains that capital uses also have very few restrictions, with the most common purposes being acquisition financing, dividend payments, and refinancing maturing debt.


Misconceptions About Sale-Leasebacks

As private equity firms consider sale-leasebacks, questions often linger regarding who qualifies for this type of financing. Many believe that because their real estate is in a secondary or tertiary market, or their asset doesn’t have a huge value, they won’t qualify. But according to Swann, that’s not necessarily true.

“If you have a specialized manufacturing facility in a small market, you may think it won’t qualify because it’s not a high-quality warehouse in a market like Southern California,” says Swann. “Despite where an asset is located, if it’s profitable and contributing to the bottom line of a business, it could be a great candidate for a sale-leaseback.”

As the market progresses through 2024, Swann expects sale-leaseback activity to continue upward, partly due to M&A activity and its flexibility to tap into capital quickly.

“Every year, sale-leasebacks become a little more accepted in the private equity community as a source of financing,” says W. P. Carey’s Swann. “Ten or 20 years ago, corporate debt was by far the dominant option, but we continue to see an increase in sale-leaseback deals every year.”


Source:  GlobeSt.


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By Ron Osborne, Managing Director, Sperry Commercial Global Affiliates | RJ Realty


As a financing method, a sale-leaseback holds more advantages for businesses compared to leveraging their balance sheets. With today’s escalated interest rates, a scenario has emerged where the sale-leaseback option outweighs borrowing avenues for companies. If a business’s borrowing rate for a leaseback (or cap rate) is significantly lower than its corporate borrowing rate, redirecting equity tied up in a building becomes a viable alternative, particularly for business expansion.

Often, businesses encounter opportunities to broaden their reach or enhance their current facilities. Capitalizing on these prospects sometimes demands more funds than readily available. In such cases, selling the property, unlocking the tied-up equity, and reinvesting it into business expansion or improvements becomes a more cost-effective solution than traditional borrowing options.

Consider this: if the borrowing rate stands at 9% to 10%, but the business can sell and lease back the property at 6% to 7%, there exists a substantial 200 to 300 basis point spread. Undoubtedly, this presents a far more advantageous financing route than leveraging the balance sheet.

This strategy empowers the company to retain control over the asset by becoming a tenant for a specified duration—a 5-year, 10-year, 15-year term, or as outlined in the agreement.  Sometime the buyer will give the ownership the First Right of Refusal or Option to buy back the property at some future time and price.

Sale-leasebacks have served companies, regardless of their size, for numerous years, facilitating business expansion, debt reduction, or other alternative uses made possible by the equity in their properties. They’re  an excellent method for companies to unlock dormant equity and channel it toward paying off debts, acting as a debt substitute, or funding crucial business-related upgrades.

Given the recent substantial rise in interest rates over the past couple of years, businesses eyeing property purchases or refinancing endeavors to expand could view a sale-leaseback as a viable alternative to an SBA loan.


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The current economic climate has been difficult, with Federal Reserve interest rate hikes chasing inflation. Even as some of the pressures might be reaching a plateau, the Fed has made clear that further rate increases are still planned. That has led corporate lenders to become more cautious. They’ve been tightening their standards and lowering the amount of leverage available.

“Typically, a mortgage lender will provide 75% to 80% of the loan-to-value of the property,” says Gordon J. Whiting, managing director and head of net lease real estate at Angelo Gordon. “In today’s macroeconomic conditions, it’s much harder to get access to capital, it’s harder to get a loan, and you’re only getting 60%.”

Even as the corporate lending market has become less liquid and more expensive, capital remains available for sale-leasebacks at very attractive terms. Even as property values have been dropping — though they’re still largely at or above pre-pandemic valuations — the return to a company is still better. “They’re able to get 100% of the value today,” says Whiting.

The Advantage of Renting

There’s rent to pay, yes, but unlike interest on a loan, it’s completely deductible as an operating expense. The seller can also typically negotiate control for 20 years with options to extend.

“The rental will be lower than what they’d have to pay in financing,” Whiting adds.

And the longer the lease term, the better the value to both the buyer and the seller, making negotiation of that point easier.

With the future uncertain and rates potentially going higher, there is also value in locking down a strategy with certainty.

“You’re better off doing a sale-leaseback and paying off some of the more expensive or floating rate debt,” notes Whiting. “Cash is king.”

The more liquidity on hand, the easier it is to deal with unforeseen circumstances.

Why Working Capital Now Is King

Sale-leasebacks are also a great source of acquisition financing, particularly in the current market environment, where distress may drive opportunities for strategic add-on acquisitions. Companies can use sale-leaseback proceeds to help fund new acquisitions or expand upon existing platforms. A vertically integrated company might decide to buy a supplier. Sponsors can do the same, using proceeds of a sale-leaseback done at the time of an acquisition to lower their capital costs for the deal.

“Now sale-leasebacks are another arrow in a CFO’s quiver,” Whiting says.

From Whiting’s view, the market uncertainty and potential for ongoing rate increases are also a source of danger, with a sale-leaseback being an option to consider sooner, not later.

“Time is not your friend,” he says. “In our view, we’re headed into an environment where you’re going to be glad you did it the day before and not the day after.”


Source:  GlobeSt.