What is a sale and leaseback?
Updated: 6 days ago
A sale and leaseback is when a business sells a property it owns and immediately leases it back from the buyer. The business keeps operating from the same building — it just no longer owns it. This releases working capital to the business in exchange for paying rent going forwards.
The key consideration for any business when looking at a property transaction is that it does not disrupt on site operations. A sale and leaseback converts an illiquid asset (property) into capital without disrupting what happens day-to-day. As a tenant, you are still responsible for outgoings and maintaining the property, you have just swapped ownership for leasing.
It is often seen as an alternative to secured lending or raising equity. It is typically a long term commitment of 15+ years. Leases and Statutory Instruments (such as the Landlord and Tenant Act 1954) ensure that you continue to have the same rights to occupy the property in the same way as if you owned it.
What is the process?
To undertake a sale and leaseback, the process is relatively straightforward – an appraisal is undertaken to assess what the rent and likely proceeds will be. After that has been discussed, a marketing process is undertaken targeting investors who focus on this type of property investment opportunity. Following a competitive bidding situation, a preferred bidder is chosen and then lawyers are instructed to draft the legal documentation. Following these negotiations, the documents are signed, ownership is transferred to the investor and the proceeds to the business.
What are the considerations?
Typically businesses look at sale and leasebacks through a number of different lenses:
Operationally - how does this impact on my use of the site?
Accounting – what are the balance sheet and tax consequences of doing this deal?
Financial – how does the cost of this compare to other means of raising capital?
The relative importance of the different considerations will vary for every business.
Who does them and why?
Sale and leaseback can release trapped capital for reinvestment back into a business allowing it to be used on growth activities, M&A, debt repayment, capital projects etc.
A key point to consider is that sale and leaseback proceeds do not need to be paid back (unlike a loan) which reduces re-financing risk for a business.
If we look at who undertakes sale and leasebacks, there tends to be a mix of well known brands (Sainsbury’s, Aldi, McLaren, JLR, Mitchell & Butlers etc.) and lesser known manufacturers and industrial businesses. If we look at the first bucket, it is easy to see that these types of businesses have large real estate portfolios and are looking to optimise the mix of owned and leased properties in their portfolios. The second bucket is just as active with a wide variety of businesses converting the ownership of their factories and warehouses to leasehold.
What impacts on proceeds?
When looking at what impacts pricing, there are a number of different value drivers:
Covenant strength
Building quality
Location
Lease terms
Level of rent
During negotiations for a sale and leaseback, there is a balance between what the business wants (typically flexibility and highest proceeds and what an investor wants (certainty of income and term duration). This can rule out certain properties – if you’re not sure you need a building for the long term (10+ years) then it's probably not a good fit for a sale and leaseback.
The final word
Sale and leasebacks give optionality for a business with owned property assets to convert balance sheet into working capital without impacting on operations. There is a switch between freehold and leasehold ownership and a new long term relationship with a landlord.
Speak to Capcore if you have any general questions on sale and leasebacks or have specific ones that relate to your portfolio, we would be happy to have a no obligation discussion.