Businesses that own real estate are increasingly choosing to free up capital using a sale-leaseback strategy that can include a single tenant net lease (STNL) investment offer. In a classic sale-leaseback strategy, a property owner sells the real estate used in its business to an unrelated investor and simultaneously leases the property back from the buyer for a fixed period of time at an agreed rent.
The STNL strategy, in which only one tenant occupies a given building, generates the best sale price for the seller because the business, credit-worthiness, and stability of the new tenant are known by the investor when the seller transitions to being a tenant. Finance chiefs often create and structure the lease portion of the agreement to support specific business objectives, including rental amount, lease term, and number of renewal options. STNLs are also attractive to investors because they are easy to own—there is only one rent payment received every month and typically no payments to make (the tenant pays operating expenses like taxes, insurance, utilities).
CFOs considering a sale-leaseback strategy are typically attracted by the opportunity to control their destiny at their current location(s) and at the same time tap into a financing mechanism that has real advantages over borrowing money from a bank. For example, when mortgaging a building, a company would likely be able to borrow a maximum of 75% of the building’s value. In a sale-leaseback, the seller can receive the entire value of the building in return for signing a long-term lease.
Further, firms that borrow money from a bank may only be able to deduct the interest component of the mortgage payment, whereas in a sale-leaseback, the entire amount of rent paid each year may be deductible. Recent changes to the tax code could make this even more of an advantage, as Congress has now put limitations on how much interest expense a company can deduct. This could also enhance the overall tax efficiency of a sale-leaseback.
“Different businesses use sale-leaseback strategies for different reasons,” says Jonathan Hipp, President and CEO of Calkain Companies, a leader in the net lease investment community. “Most sellers are seeking to optimize their working capital, but others are attracted by tax benefits, operational streamlining, and even takeover deterrence. The benefits are many, and the path to success is well-trodden by leading firms.”
In sum, companies looking to raise capital have another option besides debt and equity to consider. The STNL marketplace is one of the most liquid of all the real estate verticals, with price discovery, transaction timing, and certainty of closing all easily gauged. From a business owner’s perspective, this means that, when pricing out and trying to determine the feasibility of different financing alternatives, a sale-leaseback strategy often compares favorably.
For more information about sale-leaseback strategies, visit Calkain’s website.