Unlocking Equity in Commercial Property with Sale-Leaseback Deals

The current lending environment has made it difficult for commercial property owners to access capital from traditional lenders. Over the past 90 days, 48% of lenders have tightened their lending guidelines, making it increasingly difficult for property owners to refinance and obtain working capital.

As the global economy continues to fluctuate, commercial property owners are increasingly looking for ways to unlock equity in their properties without selling them.

If you purchased a property 4, 5, or 6 years ago, you might feel the pressure of your loan note coming due. With interest rates now at 6.27%-8.5%—up from 2.85%—you may wonder if a sale-leaseback may be the right answer for you and if it’s the time to do it.

Let’s review how sale-leaseback deals work and why they are becoming increasingly popular for commercial property owners:

 

What is a Sale-Leaseback Deal?

In a sale-leaseback deal, the seller transfers ownership of their commercial property to an investor, who then leases the property back to the original owner. This allows the original owner to retain control over the property while unlocking its equity. In addition, they can avoid any loan payments or interest rates that would otherwise be required through financing.

 

Benefits of a Sale-Leaseback Deal

The benefits of entering into a sale-leaseback deal are numerous. For starters, these deals provide cash upfront to the seller, which can be used as working capital or reinvested into other business ventures. Further, since no loan is involved, there is no debt service burden on the seller’s balance sheet and no need for personal guarantees or collateral assets.

Additionally, because most sale-leasebacks are structured as long-term leases (typically 10–15 years), buyers can benefit from fixed rental rates and predictable income streams during this period of time. Lastly, sellers have the added benefit of being able to defer taxes until after they receive the proceeds from their sale—which may result in considerable tax savings over time.

 

Negotiating a Sale-Leaseback Deal

When negotiating a sale-leaseback deal, you must consider several essential factors. For example, both parties should agree on a fair purchase price and suitable terms for the lease agreement, such as length of time and payment amount.

It’s also crucial for both parties to ensure that all legal documents are properly executed and filed with local authorities before any funds change hands. Additionally, it’s recommended that both parties seek independent legal advice when negotiating this type of transaction to protect their interests and ensure that all applicable laws are correctly followed throughout the process.

 

Why Have Cap Rates Not Gone Up As Fast As Interest Rates?

Understanding the relationship between cap rates and inflation can be complex, and it’s important to remember that there is no direct correlation between the two.

Cap rates are heavily impacted by changes in the money flow – which is ultimately controlled by one entity: the government. They have the power to cause inflation through their control of currency, using interest rates as a tool to stimulate or slow down economic activity. However, it’s essential to note that such financial tools do not reflect actual economic behavior.

There is still a ton of money on the sidelines that investors are ready and willing to deploy to pursue attractive commercial real estate opportunities such as sale-leasebacks.

The golden rule: cap rates respond to the flow of money, not interest rates.

For many commercial property owners facing unfavorable lending conditions due to tight lending guidelines by banks and other financial institutions, a sale-leaseback deal may be an ideal solution for unlocking equity without taking on additional debt obligations or personal guarantees.

With continued low levels of unemployment and strong economic growth driving up demand for such investments, now may be an opportune time for those interested in taking advantage of these deals before cap rates start increasing in response to rising interest rates.

 

To learn more about how you might benefit from a sale-leaseback deal on your commercial property, contact us today!

 

Let’s Chat.

Difference Between a 1031 Exchange and a Normal Transaction-1

What You Need to Know About the Only Difference Between a 1031 Exchange and A Normal Transaction

As a commercial property owner, you're likely aware of the many benefits associated with 1031 Exchanges. From avoiding capital gains tax to deferring payments on the entirety of your properties' value, these Exchanges offer powerful financial advantages for savvy...
Commercial Real Estate Loans Coming Due: Are You Prepared?

Commercial Real Estate Loans Coming Due: Are You Prepared?

As commercial property owners, it's no secret that navigating the challenges brought on by the pandemic has been difficult. From managing health and safety protocols to adjusting to the sudden shift to remote work, the industry has had to pivot in ways we could never...
Understanding the Key Parties in a 1031 Exchange Transaction

Understanding the Key Parties in a 1031 Exchange Transaction

For commercial property owners, a 1031 Exchange offers an excellent opportunity to defer taxes on the sale of a property. This tax-deferred exchange offers a smart way to reinvest profits from selling one property by leveraging it to purchase a similar property with...
Guide to Understanding the 1031 Exchange-1

The Comprehensive Guide to Understanding the 1031 Exchange for Commercial Property Owners

As a commercial property owner, you constantly search for ways to reduce your tax liability while maximizing your investment returns. One method that you may have come across is the 1031 exchange. While it may sound daunting, it can be a beneficial tool to defer...
Is Now The Time To Hire a Commercial Real Estate Broker?

Is Now The Time To Hire a Commercial Real Estate Broker?

When you are ready to buy, sell, or lease industrial or commercial property, the right real estate professional can be an invaluable asset. But how do you know when it’s time to hire a professional? We have gathered the five tell-tale signs that indicate it’s time to...
5 Benefits of Working With a Commercial Real Estate Broker

5 Benefits of Working With a Commercial Real Estate Broker

If you own or are considering purchasing or leasing an industrial or commercial property, consulting with a professional Real Estate Broker can be beneficial for many reasons. Here are five of the most important benefits that you should take into consideration before...
10 Questions To Ask Before Hiring a Commercial REALTOR - 125

10 Questions To Ask Before Hiring a Commercial REALTOR

As a commercial property owner, you must do your due diligence when selecting the right REALTOR for your needs. Working with the right professional will ensure that you make well-informed decisions throughout the process. To help you in the selection process, below...
Is Now the Time to Sell Your Industrial Property_-125

Is Now the Time to Sell Your Industrial Property?

Are you a commercial property owner who purchased an industrial building 4, 5, or 6 years ago? If so, you may feel the pressure of your loan note coming due. With interest rates now at 6.27%-8.5%—up from 2.85%—you may wonder if it’s time to refinance or sell your...
How to Take Advantage of Market Cycles as an Industrial Owner-125

How to Take Advantage of Market Cycles as an Industrial Owner

As part of the commercial real estate industry, we all are aware of the importance of buying and selling at the right times. We know that when the market is low, it’s a great time to buy. And when the market is high, it’s a great time to sell. But how do you actually...