The Rise in Sale-Leasebacks: An Appealing Alternative in Today’s Economy
Amid rising interest rates, unpredictable market conditions and persistent inflation, sale-leasebacks—where a property owner sells an asset and then immediately leases it from the buyer—are gaining popularity as a safe alternative to traditional financing.
According to recent data from SLB Capital Advisors, a real estate advisory firm, dollar volume of sale-leaseback deals surged 8.3% to $5.1 billion in the second quarter of 2023 over the first quarter. In an interesting twist, industrial sale-leaseback transactions slumped—representing just 39% of all transactions for the second quarter—while retail spiked to its highest level of sale-leaseback activity since the onset of the pandemic. This trend is evidenced by Realty Income’s acquisition earlier this year of EG America’s convenience store portfolio—comprised of 415 single tenant properties throughout the Northeast—for $1.5 billion. Under terms of the sale-leaseback transaction, EG America continues to operate the convenience stores, which include Cumberland Farms, Tom Thumb, Fastrac and Sprint locations.
With today’s unpredictable economic climate and the accompanying tight capital market resulting in lenders becoming more cautious, sale-leasebacks are an appealing investment option due to their mutual benefits for both the buyer and the seller. As a buyer, one can obtain the full equitable value of the property, maintain possession of the property and continue business operations without interruption. Furthermore, sale-leasebacks are particularly useful for long-term leases in which a potential property owner can minimize short term changes in the markets. However, sellers should research their buyers to determine whether they would be a good landlord and are the best fit for the seller’s business. This includes contacting current existing tenants, reviewing their investment history and access to capital and ensuring they understand the business, which aids the buyer in negotiating current long-term deal terms as well as future needs and deal terms. The same applies to buyers in determining whether the selling company would make for a quality tenant. Specifically, researching the stability of their business and whether they are able to maintain their obligations under the lease for the entirety of the lease term. In any real estate transaction, relationships are key—knowing and understanding the intentions of your sale-leaseback partner are fundamental to a successful transaction.
Whether a buyer or a seller, it is important to pivot during uncertain times to continue successful operations of a business or to maximize investment opportunities. Sale-leasebacks allow parties to act now rather than to wait out this uncertain time. They are, therefore, an attractive alternative to the traditional avenues.
Our attorney Chanel Di Blasi recently wrote about the pros and cons of sale leasebacks in an article published in Law360.
The full article can be read here (subscription required).