How Sale-Leasebacks Help Support PE Success in a Tight Financial Market

Businessman holding building of real estate icons. Engineering and construction. Investment and business development.

In a world where deal flow and funding have slowed, today’s private-equity-backed organizations must look inwards to identify areas where they can free up cash and cut down on overhead spending.

One such endeavor involves sale-leasebacks: a type of transaction that unlocks capital without the setbacks of debt accrual.

We joined forces with Jeffrey Jackson and Reed Hudson of CBRE to outline some essential information about sale-leasebacks, share one of CBRE’s real-world success stories, and dive into the benefits this type of transaction can bring to organizations looking to grow.

Important things to know about Sale-leasebacks:

  1. What is a Sale-leaseback?
  2. What does an organization need to do to ensure Sale-leaseback readiness?
  3. Benefits of Sale-Leasebacks

What is a Sale-leaseback?

A sale-leaseback is a type of business transaction in which an organization sells an asset (ex: real estate or equipment) to a buyer and then leases it back from said buyer. This process provides businesses with the opportunity to free up additional funds without rescinding full control and ownership of the asset in question.

What does an organization need to do to ensure Sale-leaseback readiness?

“Ideally, the business will have their real estate in a sale-ready condition. This means there are not significant capital expenditure needs, environmental issues, or outdated systems. In addition, it is critical the business has their financials in line in order to be perceived by potential investors as a viable long-term operating entity. Lastly, be flexible! Sale-leaseback transactions are a negotiation and not one size fits all. What might work for one investor may not work for another. Be prepared to negotiate the price of the asset, the length of the lease term, rental increases, and various lease provisions.”

Jeff Jackson, Senior Vice President at CBRE

The CBRE team also shared that organizations should be committed to this transaction for the long haul in order to achieve a maximization in value, as a 15-year lease agreement will provide a much larger and more sustainable influx of capital compared to a 5-year lease.

In addition, the company should be financially viable in having a positive net worth and EBITDA and put a hefty focus on collaborating with their accounting departments to make sure the transaction is viable.

Sale-Leaseback process steps:

  1. Determine the asset your organization would like to monetize.
  2. Collaborate with potential buyers (either a real estate investor or financial institution) to identify the entity from which you will be selling and leasing the asset.
  3. Work with the buyer to agree upon the price of the asset.
  4. Develop the lease agreement with the buyer, including the terms of the lease, lease duration, rental rate and other relevant information.
  5. Ensure alignment with the accounting department to outline how the transaction will affect their books and tax standpoints.
  6. Lease the asset from the buyer and attribute the influx of cash to other growth initiatives.

Benefits of Sale-Leasebacks

Allows organizations to gain the full value of their real estate while retaining operational continuity

Sale-leasebacks provide a lucrative opportunity for organizations to realize the full value of their real estate by obtaining an influx of cash without the costly aspects of debt accrual.

This capital can then be used for additional investment opportunities (such as debt repayment or investments for growth) without causing the company to lose control or ownership of the asset.

Improves financials by moving the asset off the balance sheet

As sale-leasebacks are commonly structured as off-balance-sheet operating leases, the seller’s balance sheet will improve as it no longer contains a large, illiquid asset.

In turn, this can support the improvement of financial ratios – especially if the capital received from the sale-leaseback is attributed to debt repayment.

Provides tax benefits

As the seller becomes a tenant – and if the lease qualifies as an operating lease – organizations can receive additional tax benefits, as the rental fee is tax deductible. The specific tax benefits will depend on the location of the asset and its related accounting treatments.

Sale-leaseback success story and real-world example

A well-known private equity group needed to raise significant capital for one of their portfolio companies to pay down senior level debt. 

The challenge was that this company operated in metal industrial buildings in tertiary markets in the Midwest, was a non-investment grade tenant with less than a 50-year operating history and all this amid a rising interest rate environment.  

After a competitive RFP process, the client selected CBRE’s Houston Net Lease Property Group to market a sale-leaseback portfolio of  three properties. After less than a month on the market, CBRE procured more than six offers.

CBRE worked closely with their client to establish a successful closing timeline and the proceeds from the sale-leaseback exceeded $21,500,000, which was nearly 3 times the residual value of the assets they had listed on their books. 

This resulted in the client’s ability to not only pay off debt but free up additional capital for other investment opportunities without engaging in external financing.    

“CBRE is the largest real estate company in world. We have contacts in almost every market across the globe, which provides us with the unique ability to reach out to our local associates within these communities to ensure we are getting the most competitive leasing prices and market knowledge available to help organizations drive sale-leaseback success.”

Reed Hudson, First Vice President at CBRE

Final Thoughts on How Sale-Leasebacks Help Support PE Success in a Tight Financial Market

“As we move forward into 2024, we foresee sale-leasebacks picking up for a multitude of reasons: the traditional lender/bank route doesn’t necessarily make sense in the midst of skyrocketing interest rates, and with today’s CAP rates, organizations are better equipped to self-capitalize a portfolio by leasing their associated real estate compared to 12 months ago.”

Jeff Jackson, Senior Vice President at CBRE

Making the decision to embark on a sale-leaseback requires careful consideration of the seller’s financial health and the long-term impacts this transaction may bring.

In addition, it is essential to collaborate with accountants, tax specialists and legal advisors to ensure the maximum value of the deal can be realized and that the goals of the transaction can be efficiently met.

Our experienced team at Bridgepoint Consulting and partners at CBRE are ready to help you with:

  • Categorizing, assembling, and structuring lease agreements.
  • Determining the price of an asset through superior market knowledge and industry leading sales and lease comparables.
  • Negotiating with buyers to ensure maximization in lease terms and value.
  • Supporting the organization through the transaction and providing ongoing support to track progress against goals.

About Reed Hudson

T. Reed Hudson is First Vice President in CBRE’s Houston office and brings over 25 years of vast commercial real estate experience on both the corporate and brokerage side of retail, office and industrial real estate. As part of CBRE’s Net Lease Property Group, Mr. Hudson specializes in the sale-leaseback, disposition and acquisition of net-leased properties in Texas and throughout the United States.

About Jeffrey Jackson

Jeffrey Jackson is a Senior Vice President at CBRE and helped establish the Capital Markets Net Lease Property Group in Houston. Mr. Jackson advises developers, REITs, institutions, corporations, private equity firms and high net worth individuals in all aspects of net leased properties. He specializes in dispositions, acquisitions, recapitalizations, portfolio sales, corporate sale-leasebacks and build-to-suit transactions. Mr. Jackson has extensive experience across all asset classes including retail, medical, office and industrial properties. Throughout his career, Mr. Jackson has been involved in over $900 million worth of net lease transactions nationwide.

About CBRE

With more than 115,000 professionals in over 100 countries, CBRE is the global leader in commercial real estate services and investment. Their mission is to realize the potential of their clients, professionals, and partners by building the real estate solutions of the future. From instilling confidence in today’s decisions to re-imagining tomorrow’s spaces, CBRE thrives in complex and ever-changing environments. With deep market knowledge, superior data, and proprietary technology, their multi-dimensional perspective helps clients use real estate to transform their business and find greater success. Learn more about how they can help here:

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