Sale-leasebacks have long been an effective capital solution for private equity groups, operators, franchisees and franchisers. Utilized as a financing vehicle, sale-leasebacks allow a company flexibility within its capital structure to redeploy capital into the core business, reduce long- and short-term debt, make distributions, and fund new developments or remodels.
A standard lease in today’s market is typically 10-20 years, with base rent subject to increases annually or every five years. The sales proceeds generally are used to pay down debt, fund capital expenditures and finance growth.
Sale-leasebacks can be a prevalent piece of the capital structure in an acquisition of a company along with traditional bank debt, mezzanine debt and credit lines. In a sale-leaseback transaction, an owner and operator sells their property to an investor in exchange for a lease commitment by the operator as the tenant.
More recently, private equity groups, franchisees and operators have used sale-leasebacks to expand their companies through acquisitions, leveraged buyouts, mergers or roll-ups. Through this strategy, these groups can simultaneously sale-leaseback their facilities along with their acquisition of the business. This provides business operators the ability to take on an acquisition they may not have previously had the capital to secure. In many cases, the sale-leaseback of the real estate can be valued more than the purchase price of the operating business and the underlying real estate.
In addition to business acquisitions, sale-leasebacks can be a useful tool for opening new locations or renovating existing facilities. In an acquisition, an operator can use sale-leasebacks to fund the development of a new location by entering into a contract to purchase a property and finding a sale-leaseback buyer who will close under the terms of the operator’s purchase contract. This technique can allow operators the ability to fund new developments or improve existing ones.
One of the newer, more creative forms of sale-leasebacks is utilized by operators who do not presently own the real estate of their business but are subject to an existing lease. Most tenants who are presently under a lease are not aware that they can create that same sale-leaseback model through STNL’s “Buy and Recast” strategy.
Through a Buy and Recast approach, a tenant purchases property back from the existing landlord. Once the purchase agreement is executed, the operator can market the property with the intention of selling to a sale-leaseback investor. The purchase price and new lease terms are combined to determine the current property value and cost of the renovations to recalibrate, or “recast,” lease terms. In most cases, the tenant is never taking title to the property, as the current landlord will deed the property directly to the sale-leaseback purchaser.
Regardless of the strategy that is employed, sale-leasebacks can be an extremely useful solution for many groups who are trying to expand, reduce debt, fund capital expenditures or monetize their existing real estate.
Nico DePaul is an executive managing director with STNL Advisors, which provides real estate consulting services to private equity firms and operating companies.