Cliches are common in the lingo of business. For one, we often hear about “windows of opportunity,” how new ones are opening and, more frequently, the timeframe for those opportunities before those much-touted windows once again close.
Such is the case now with Sale-Leasebacks (SLBs), the self-explanatory vehicle through which owner/occupiers have the ability to unlock the hidden value of their commercial real estate. Today, they are in the midst of a massive surge in popularity. But given the one-two punch of increasing cap-rate pressure and interest-rate hikes, we might very well be perched right now at the top of that market and the maximum opportunity they provide. In other words, that window of opportunity might be closing.
Indeed, the current surge in interest in SLBs has been unprecedented, and with good reason. Owner/operators are rethinking their real estate holding strategies in efforts to reap the rewards of an attractive cap-rate/interest rate environment.
Meanwhile, a growing number of investors are seeking out single-tenant net-lease (STNL) opportunities, and rightly so. They are drawn to STNLs’ many benefits, including, but not limited to, the value of a known, creditworthy and long-term (20- to 25-year) tenant and the ease of operation, since control of the asset is now in the hands of the tenant.
Operators are feeding that need and, in the process, monetizing 100% of their asset value at very attractive pricing, in exchange for rents that are fully deductible. In the process, they gain control of both their leases and the operation of the building. And these are only the start of the benefits to be gained by SLBs. For more details on SLBs and their benefits, click here.
In addition, we are now living in a new tax environment, courtesy of the recently enacted Tax Cuts and Jobs Act. As we discuss in our current CFO white paper, despite the good news it brings, there are also some potentially burdensome features of the Act for businesses, especially in terms of limitations on interest deductions. SLBs can help mitigate those burdens.
In short, the surge in SLB interest is being driven by a perfect storm of dovetailing investor and occupier need in an economic environment ripe to maximize the benefits of both.
And there lies the window of opportunity. But how long will that window remain as wide open as it currently is, feeding that surge of interest? Of course, no one can say for sure exactly what will happen with interest rates, beyond the expectation that they are sure to rise, and that the pressure on cap rates will continue to grow.
Wise CFOs are recognizing the changing nature of opportunity. They are heeding the call to action. They are recognizing the need to maximize their real estate now, and lock in those 20-to-25-year terms. They are recognizing that the time to strike with a Sale-Leaseback is now.