Reasons to Consider Sale-Leasebacks Now More Than Ever

This may be the most advantageous method of obtaining capital in the current economic climate.

With inflation being chased by interest rate increases from the Federal Reserve, the present economic situation has been challenging. The Fed has indicated that additional rate rises are still expected, even though some of the pressures may have passed their peak. Lenders to corporations are taking the risk-averse approach, tightening their requirements and reducing the available leverage.

According to the managing director and head of net lease real estate at Angelo Gordon, Gordon J. Whiting, a mortgage lender will typically give 75% to 80% of the loan-to-value of the property. Whiting adds,  “In today’s macroeconomic conditions, it’s much harder to get access to capital, it’s harder to get a loan, and you’re only getting 60%.”

Capital is still readily accessible for sale-leaseback transactions at very competitive rates despite the fact that the corporate loan market today is less liquid and more costly. While we’ve seen somewhat of a decline in property values, the return to a corporation is still higher.

Renting Can be Beneficial for a Business 
While rent is a costly expense, it is entirely deductible as an operating expense, unlike a loan’s interest. Additionally, the seller often has the chance to negotiate control for 20 years with extensions. Whiting continues,  “The rental will be lower than what they’d have to pay in financing.” On top of that, a longer lease period provides better value to both the buyer and the seller, making that aspect easier to negotiate.

There is added benefit in securing a strategy with certainty, especially given the uncertain nature of the future and the possibility of rising interest rates. Many would agree, doing a sale-leaseback and paying off some of the more expensive or adjustable-rate debt is preferable. The more liquidity you have on hand, the simpler it is to deal with unforeseen events.Working Capital is Paramount Today

Sale-leasebacks are an excellent source of purchase financing, especially given the current state of the market, which in some cases is conducive to strategic add-on acquisition prospects. Profits from sale-leaseback transactions can be used by businesses to support new acquisitions or platform expansion. The money from a sale-leaseback that was completed at the time of acquisition might be used by sponsors to reduce their capital costs for the transaction.

Whiting believes that the market uncertainty and potential for future rate hikes are additional sources of risk and that a sale-leaseback should be considered as soon as possible. He adds that we are in a situation where you’ll wish you had done it the day before rather than the day after.