“It tends to work well in environments where you have investors actively looking for property and businesses doing well,” says Alec Pacella, a senior vice president at NAI Daus. “There should be an active pool of investors on one side and companies that are doing well and have prospects for doing even better if they can get an injection of capital on the other side.”
Smart Business spoke with Pacella about the process of selling property and leasing it back — and how it can be a win-win for both parties.
What is attractive about a sale/leaseback?The investor gets a good piece of real estate with a good, growing company. The company gets to access capital at basically little or no cost, unlock the real estate capital and reinvest the proceeds into its business. Then it can earn a substantially higher return on that capital versus having locked-in real estate and earning little.
It is an opportunity to acquire real estate as a long-term lease with a long-term tenant in place. But because there is usually only one tenant, it’s an indirect investment into the company. If a company goes bankrupt, then the investor has an empty building.
On the investor side, what types of concerns should be examined?An investor has to avoid paying either under market or over market for either the purchase or the leaseback. The more the tenant is willing to pay in rent, the higher the value of the real estate.
Let’s say it is only a $5 market and the tenant is paying $8 in rent. That is probably not the best situation. If the tenant does happen to leave, it’s important for the rent to be near what the market is bearing. Read Full Article Here.