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 second issue of our series on “Where A Sale-Leaseback Can Go Wrong,” so let’s dive right in…
Costly Objection #2: Need A Strongly Motivated Owner
Are you sure you really want to do this?
Because a sale-leaseback can create problems for the business down the road, there needs to either be an alignment between the owner’s and the business’ objectives, or the owner must be motivated by external factors to be comfortable taking on risk in order to receive a lump sum cash payment.
Often times, owners look to retire after decades of working and growing the operation, and they don’t want to partake in the day-to-day management but still maintain control. Performing a sale-leaseback can give them the funds to semi-retire or take on a more passive role while still calling the shots.
Sometimes, there may be other economic, familial, life, or business circumstances that create change or transition, and therefore make an exit or sale of the real estate an attractive option.
And lastly, some people may simply prefer to take the upside and appreciation in value out of the property (although they may be subject to capital gains tax) and lease the space from a landlord, whatever the cost may be.
Managing a property, ensuring the payment of taxes, and the coverage of maintenance and insurance can be additional responsibilities that are better left to someone else. Again, this largely comes down to preference, but if that is the mindset of the owner then selling may be (at the very least) worth looking at.
Overall, without these internal or external drivers pushing you to go ahead with a sale-leaseback, you could be taking on unnecessary risk. Many of the problems that can be solved with this strategy – such as getting a capital injection or unburdening yourself of management – can often also be resolved with alternative methods, one of which we will touch on in our next issue.
Until then, whatever you choose to do, having a strategy in place and 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.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.com.