The Single Tenant Sale-Leaseback Structure
While by no means a new or revolutionary concept, the sale-leaseback is a deal structure, likely promoted by the strong demand and valuations for commercial properties, has been more prevalent as of late. A sale-leaseback offers operating businesses the ability to free-up capital and simplify their operations, and is a method of financial restructuring utilized by both small business operators, i.e. Restauranteurs/franchisees, as well as large publicly traded companies, such as chartered banks.
What is a Sale-Leaseback
A sale-leaseback is a form of transaction where a business operator sells its real estate (land and building) and leases it back for a fixed term upon previously agreed to terms, maintaining control of the property for continued operation of its core-business.
In a sale-leaseback, the ‘Seller’ is a business operator who also owns its real estate, and the ‘Buyer’ is an unrelated third party who is looking to acquire a single tenant income producing property. The agreement of purchase and sale between the Buyer and Seller typically includes covenants from both parties agreeing to enter a lease agreement immediately following completion, as well as often includes a complete copy of the lease agreement that comes into effect following completion of the purchase and sale.
Benefits for a Seller – Why Lease?
A business operator’s primary concern with real estate is control and use of the property. Owning the property is one way to ensure this, however is not always necessary, as long-term control and use of a property can be arranged via a lease.
The most important reason and purpose for a business operator to consider a sale-leaseback, is a net lease unlocks capital and eliminates debt that can be put to use in more profitable investments, such as expansion of its core-business.
Additionally, a sale-leaseback allows the tenant/seller to take advantage of a positive real estate market (optimize value), improve their balance sheet by selling a fixed asset that’s carried at a below market level for cash, as well as allows a tenant/seller to reduce taxable operating income through the deduction of rental income.
Lastly, for small business operators, sale-leasebacks can be useful in resolving matters related to partnerships, succession and/or retirement planning.
Single-tenant assets, especially those occupied by strong national/regional tenants on long-term leases, have seen unprecedented demand propelled by historically low interest rates and availability of capital, lack of quality supply, continued pressure from foreign investment and increasing urbanization / densification.
A few notable companies that have taken advantage of these positive market trends and unlocked capital and value via sale-leasebacks include:
- CIBC National Portfolio: Sale-Leaseback of 92 CIBC tenanted retail banking centres
Scotiabank Western Canada Portfolio : Sale-Leaseback of 10 Scotiabank retail banking centres
- SNC Lavalin: Sale-Leaseback of its Montreal Head Office
- BMO Urban Branch Portfolio: Sale-Leaseback of 18 BMO retail banking centres to RioCan
The above represent larger scale deals, in excess of $100 M, making them unattainable for smaller private investors, however sale-leasebacks of individual property’s by small business operators, often franchise operators, are also common; a few recent examples of sale-leasebacks brokered by Form Retail include:
- JJ Bean, Vancouver BC: Sale-Leaseback of its Fraser Street location (4287 Fraser Street).
- Hemingway Books & Records, Abbotsford BC: Sale-Leaseback by business owner of the property at 33765 Essendene Avenue.
- Budget Brake & Muffler, Vernon BC: Sale-Leaseback by the franchisee of its 4405 27 Street location.
- BMO Granville Office Building, Vancouver BC: Sale-Leaseback by BMO of its Vancouver office building and adjacent parking lot at 10th & Granville
In Demand Assets
With positive market factors, including historically low interest rates, fueling strong demand for long term single tenant net leased assets , resulting in strong valuations for the same, the sale-leaseback structure continues to be an appealing option for business operators to realize the full value of their property and unlock equity. For buyers the sale-leaseback offers the opportunity to acquire a sought after single tenant asset and benefit from the full duration of a long-term net lease.
For further inquiries on this please contact Form Retail Advisor.