If you operate a business that owns and occupies its real estate, then you may know how difficult it can be to find space that meets your needs.
Finding the perfect space is not always easy, especially now with historically low vacancies, rising rental rates, and the time and financial investment required to design-build or develop land.
“Whether to own or to lease” is a common decision owners are faced with. Both have their pros and cons that must be factored in to their business and financial models. Most businesses start out leasing until they can afford (or get the opportunity) to purchase their own space, when they can begin laying roots and planning for the longer term.
Later on in a business’ maturity, however, it becomes possible to do a sale-leaseback, where an owner-occupier leases their space to themselves (to ensure continuation), before selling the property. This can be both effective and attractive to a buyer or investor, as there is a tenant to produce cashflow, while the business receives a lump sum payment.
They have become popular for a number of reasons, especially with owners looking to retire or businesses seeking a capital injection. However, some people face consequences they don’t expect when first diving in; mistakes that can not only expose them and their business to additional and unnecessary risk, but also negate any of the desired benefits.
And so, sale-leasebacks may not always be the right move.
At the end of the day, a sale-leaseback is simply a tool in every owner-occupier’s arsenal, and it may or may not be applicable (or desirable) for your given situation. To that end, we would say speak to a legal, tax, or real estate professional who can properly diagnose and prescribe a custom solution.
Now, of the mistakes that may arise, we’ve identified Four Common Objections to doing a sale-leaseback. These are the very same things that we may bring up to a prospective client when assessing their needs and desires (something we would be happy to offer you if you require guidance), and while you may be set on taking a specific course of action, it is important to understand what may happen.
Taken individually, these Objections may only have minor impacts on the future health of the business. However, a combination of many (or all) of them may put you in a dangerous position.
Today, we are in the fourth issue of our series on “Where A Sale-Leaseback Can Go Wrong,” so let’s dive right in…
Costly Objection #4: There Are Other Ways to Get Access to Capital
Is this the best way for you to get money?
If we simply view money (or capital) as a tool that allows us to do other things, then the question should be around how to procure that resource as efficiently as possible.
And if your objective is to receive a capital injection for growth or exit purposes… and the vehicle to getting there is (in your estimation) doing a sale-leaseback, then you should ask yourself…
Is this really your best option?
The reason is, when looking at the overall macroeconomy and lending market, we see that:
- Interest rates are extremely low, which makes
- Getting a loan relatively easy, and
- Refinancing your property would be faster and simpler than having to sell.
So when looking at the options available to you, you should be valuing the opportunity costs, as well as the longer-term implications of each.
And as we’ve already mentioned in previous issues;
- capital gains tax,
- finding buyers, and
- having to go through a 6 to 12-month process to close the sale…
Are all roadblocks to getting capital. On the timeline point alone, if you really need the money, can you afford to wait that long? If not, then a sale-leaseback may not be the right move for you.
Further, leveraging a debt instrument may actually be cheaper in the long run – depending on a number of factors – while preserving ownership of your property.
The good news is, there are many strategies you can employ to achieve the outcomes you may be looking for. Whatever you choose to do, having one in place along with an expert to help you navigate can make all the difference.
Contact us today if you are thinking of doing a sale-leaseback or would like help in valuing or selling your property.
Luis Almeida is the Senior Vice President and Partner of Lee & Associates Toronto, specializing in the acquisition, disposition, and leasing of industrial properties, as well as providing clients such as local and national corporations, landlords, and developers with a full range of real estate services across verticals and industries.
ABOUT LEE & ASSOCIATES
Lee & Associates is a commercial real estate brokerage, management and appraisal services firm. Established in 1979, Lee & Associates has grown its service platform to include offices in the United States and Canada. Lee & Associates provides superior market intelligence in office, industrial, retail, investment, and appraisal to meet the specialized needs of our clients. For the latest news from Lee & Associates, visit leetoronto.wpengine.com.
To get clarity and direction when looking to sell your building, or to discuss any other real estate needs, please contact Luis at 416.628.8151, email at lalmeida@lee-associates.com, or visit www.leetoronto.wpengine.com.