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 that owners are faced with. Both have their pros and cons that must be factored into 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 first issue of our series on “Where A Sale-Leaseback Can Go Wrong,” so let’s dive right in…
Costly Objection #1: Losing Control of the Real Estate
Could this be a ticking-time-bomb for your business?
Most owners are ok with leveraging a sale-leaseback, however, for a percentage of users, it may spell disaster when their lease expires. This is because they will be at the new landlord’s mercy, and if they cannot negotiate a renewal, then they may be forced to relocate.
For some businesses, it is crucial to maintain as much control as possible. For example, a company that has complex operations with specific requirements, such as:
- Custom or expensive machinery,
- High power,
- Shipping access,
- Proximity to transportation routes, or
- Other difficult-to-obtain features…
These firms may need to spread out the enormous sunk cost of getting up and running over the long-term. Further, if the production of products or services has slim margins, in addition to fixed costs, any cost increases due to sudden spikes in rent can create problems. To make matters worse, interruptions in production to relocate may not even be feasible, leaving them in a double bind.
Thus, having no other option but to stay can make it difficult to negotiate or renew with your landlord following a sale-leaseback, especially if you have owned for decades and not fully factored in current market rates (which may be significantly higher) into your business plan.
We cannot say for certain that this will or will not happen, but, for any business that is sensitive to changes in cost structures, it may be prudent to prioritize ownership, preserve predictability, and mitigate as much risk as possible.
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 firstname.lastname@example.org, or visit www.leetoronto.com.