Industrial Sale Leaseback
Ever wonder how your business could benefit from a sale leaseback? If your business operates in an industrial property and you also own the real estate, then a sale leaseback could be a great option when you’re ready to raise capital for business growth, to pay down debt, or to sell your real estate due to a business sale.
We help business operators unlock their industrial real estate equity.
What is an Industrial Sale Leaseback?
A sale leaseback, also known as a “leaseback”, is a useful and creative way for you to raise capital quickly by unlocking the value you have built up in your industrial real estate. You would start by selling your industrial property to an investor and then immediately lease it back from the new owner at mutually agreed terms. Your business would continue to operate just like before, but you would now be the “lessee” (aka, tenant) in the property, and the buyer would be the “lessor” (aka, landlord).
Here are the top reasons why you might consider a sale leaseback on your industrial real estate:
- You want capital to expand your business operation.
- You need to restructure your balance sheet and/or pay down debt.
- If your business is sold, the new owner might not be interested in purchasing the real estate along with the business and you could sell the real estate quickly through a sale leaseback to unlock your equity.
To break it down, the simplest way to think about an industrial building sale leaseback is this: You could sell your real estate and immediately lease it back from the new owner. This way, you get access to new capital but also continue to operate your business at that location just like before.
Advantages of an Industrial Sale Leaseback
If you operate a business that also owns industrial real estate assets, there are many great advantages to pursuing a sale leaseback transaction. There are some disadvantages too, so it’s important to be clear on what your business goals are, and these goals should help determine whether a sale leaseback is right for you.
Benefits of a sale leaseback for the lessee/seller
- You could quickly unlock any equity that’s “stored” in your industrial real estate to help grow your business faster.
- You decrease your overall operational risk when you no longer own the industrial real estate and that risk now sits with the new owner.
- You can improve the health of your business balance sheet by trading your mortgage (liability) for an asset (cash).
Benefits of a sale leaseback for the lessor/buyer
- They get a lease that is guaranteed by your operating business
- They get a consistent and predictable stream of income for a long period of time
- They get a fair return on their invested capital
As you can see from these benefits, a sale leaseback can be a truly win-win scenario for both you, the business owner, and the buyer/investor alike. While there are many details that both parties need to agree on, such as the lease length, monthly payments, etc, the sale leaseback transaction provides many advantages and is a useful tool you should consider if you are looking to raise capital quickly for your business.
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Industrial Sale Leaseback Risks
Like all transactions, there is always some risk involved and you should be aware of the common sale leaseback risks that could affect both the seller and buyer. These risks can usually be assessed and mitigated during the due-diligence phase so that both parties can be prepared to wisely complete their sale leaseback transaction.
Risks of a sale leaseback to the seller/lessee
- You could have a new investor/landlord that’s difficult to work with.
- You give up the future appreciation in your real estate.
Risks of a sale leaseback for the buyer/lessor
- The tenant business could default on their lease agreement forcing an eviction.
- The tenant business is in daily control of the real estate and could start using it in an unauthorized or illegal way.
While there are many considerations for both the seller/lessee and buyer/lessor, these common risks can be mitigated by each party before entering into an agreement. For example, if you operate a business that operates in an industrial space and are considering a sale leaseback, it would be worth your time to get to know investor first and speak with other tenants of the investor to get a clear picture of how they will treat you as the new landlord.
For the buyer/investor, it is important for them to mitigate these risks by understanding your business model and financial health of the tenant. Investors will want to know the strength of your business in terms of the following:
- Is your business growing or shrinking?
- What is the gross revenue of your business for the past few years?
- What entity will be guaranteeing the lease and what is that entity’s creditworthiness?
Industrial Sale Leaseback Examples
While there are many industrial sale leaseback examples, here are a couple that should give you a clearer picture of why might choose to do a sale leaseback for your industrial real estate.
Example 1: Manufacturing Expansion
David and his family own a successful metal parts manufacturing business in Indiana. While they have been in business for over two decades, the business has been expanding quickly and they were looking to expand their manufacturing operation. They located a new industrial building near their main property that was for sale. They researched what it would take to finance the purchase of the new location and realized that they would be able to purchase the new location without financing if they raised capital by selling the real estate from their two current industrial properties in a sale leaseback transaction. This would free up the capital they had built up over the years in their real estate. This allowed them to purchase the new industrial property without taking on any new debt and actually improved their balance sheet in the process. They removed mortgage debt from their current properties and increased their assets with the purchase of the new building. They came to an agreement with an investor and sold their industrial real estate and immediately signed a 15 year lease to remain and continue to operate in the initial properties.
Example 2: Manufacturing Business Sale
Mark owns and operates a successful manufacturing company with industrial assets in Ohio. The company was acquired by a competitor business and Mark was able to retire. The new owner wanted to unlock the equity that had built up in the various industrial real estate locations that were owned by the company to facilitate their manufacturing operation. The acquiring company decided that a sale leaseback transaction was the cheapest and quickest way to unlock this real estate equity and allow the business to reduce its debt load and prepare for the next phase of growth. After the acquisition was complete, the new owners found an investor who was willing to purchase the real estate for fair market value and immediately signed a longterm lease with the buyer to lock in a great lease rate that will help control expenses into the future.
Hopefully, these two examples give you a better picture why you might consider a sale leaseback to unlock your industrial real estate equity.
Industrial Sale Leaseback Agreement
While the sale of your industrial real estate is the first half of the transaction, the leaseback agreement itself is equally important to both the you, the tenant, and the buyer/lessor. The primary concerns in the leaseback agreement itself are the lease length, and the amount of the monthly lease payments. You can use a sale leaseback calculator to understand how the sale price and the lease length and payment amounts are related. Typically both parties start their negotiation by using a standard industrial leaseback agreement template that includes the primary elements of duration and monthly payments, but the agreement also should have any important details related to the responsibility of each party.
Here’s a partial list of elements any industrial leaseback agreement should have:
- Length of lease in months
- Monthly lease payment amount
- Lease renewal options
- Lease payment increases and timing
- Entity that is guaranteeing the lease
- Consequences in the case of a late lease payment or default on lease
- Management and financial responsibility breakdown of various elements (Insurance, taxes, maintenance, improvements, roof, structure, HVAC etc.)
Next Steps
While there are plenty of commercial real estate brokers who would offer to help when you are ready to think through an industrial building sale leaseback for your real estate, there are actually few companies that specialize in the sale leaseback process. These select companies, like SaleLeaseback.co work directly with business operators and private equity companies to buy real estate directly with zero fees and a quick process. We help you think through your options and potential pitfalls associated with a sale leaseback transaction for your particular situation. So, if you are considering a sale leaseback to raise funds for your business expansion or debt pay-down, start by letting us give you a free offer for your real estate.