Corporate borrowers face a challenging situation as their debt matures during an unfavorable time in the capital markets. Factors such as inflation, GDP growth expectations, and the Federal Reserve’s actions have reduced available leverage and increased borrowing costs. Moreover, corporate lenders have become more discerning, imposing restrictive covenants on borrowers. As a result, many chief financial officers of operating companies are seeking alternative sources of capital. One increasingly popular option to bridge the capital structure gaps is the utilization of sale-leasebacks.
The difficulties impacting the capital markets, such as high-interest rates, costly borrowing, and greater amortization, also affect commercial real estate. However, sale-leasebacks offer attractive rates and enable sellers to receive full proceeds. According to Gordon Whiting, the managing director and head of net lease real estate at Angelo Gordon, it is an opportune time for companies to explore sale-leasebacks. Whiting highlighted two key considerations when evaluating sale-leasebacks in the current market.
A Solution for a Challenging Market
The Federal Reserve’s pursuit of higher interest rates can severely impact a company’s cash flow. Furthermore, the overall economic conditions are straining businesses precisely when securing financing for operational improvements or capital expansions has become more difficult.
“Sale-leasebacks are gaining interest because the cost of financing for companies has risen,” explained Whiting. In a sale-leaseback arrangement, a company that owns property sells the building to an investor who then leases the property back to the company on a long-term basis, typically spanning 20 years or more.
This strategy combines elements of a real property sale with a corporate financing arrangement but is executed at cap rates lower than corporate lending rates. By unlocking property assets on their balance sheet, companies can generate cash to invest in their business for various purposes, such as developing new products, expanding operations, or implementing growth initiatives to increase revenue and profits. Since these arrangements are long-term, companies retain access to their critical facilities. Additionally, lease payments are considered operating expenses, providing lessees with tax advantages.
“Sale-leasebacks can be an excellent tool for CFOs to raise capital,” emphasized Whiting.
The Time is Ripe for Sellers
Various industries increasingly utilize sale-leasebacks, including retail, manufacturing, cold storage, distribution, and medical offices. Whiting advises any company considering a sale-leaseback to be aware that time may be of the essence in the current environment.
“Sellers are realizing that the value of their real estate may be higher today than in the future,” Whiting stated. “Moreover, sellers are facing economic uncertainty and the prospect of higher interest rates in the coming years, making capital more expensive.”
On a positive note, buyers and sellers are eager to finalize deals swiftly. To enhance the chances of a successful transaction, Whiting suggests assessing the entire real estate portfolio to identify multiple properties suitable for sale-leasebacks. “Having multiple properties generally leads to better pricing and increased interest from buyers,” he added, resulting in a larger payout for the seller.
Westside Realty Advisors has recently concluded several sale-leasebacks, providing capital to corporate property owners.
If you want to learn more about sale-leasebacks and how we can help provide capital to pay off debt or utilize in your business, please contact Gary Aminoff at (310) 432-6464 or gaminoff@kwcommercial.com.
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