USA Seeing an Uptick in Triple-Net-Lease Sale-Leaseback Listings and Transactions

Triple  Net Lease Market 

Triple-Net Sale-Leasebacks Are Gaining Ground

Commercial real estate professionals across the country are seeing an uptick in triple-net-lease sale-leaseback listings and transactions. These transactions can be highly effective for companies looking to reallocate risk, eliminate debt and create capital. They also can provide a passive investment with long-term returns for the triple-net-lease asset buyer.

Understanding what this transaction is and how to exercise it is essential to buyer and seller success. Commercial mortgage brokers should be familiar with the ins and outs of triple-net-lease sale-leasebacks to help their clients secure financing for these deals.

What is it?

A triple-net-lease sale-leaseback is a real estate transaction a company or corporation can use as a financing tool. The entity that owns a property sells it to a passive investor to realize a cash infusion and possibly pay off current debt. It then becomes that asset's long-term tenant through a triple-net lease executed with the new property owner.

Traditionally, a triple-net lease is a lease where the tenant pays all expenses associated with the property. This typically includes annual rental amount, property taxes, insurance and any property management. The tenant also agrees to be solely responsible for the maintenance of the building, roof, parking lot, etc.

A triple-net-lease sale-leaseback strategically makes the current owners the new tenants and allows them to raise capital while maintaining control of the site and operations. At the same time, the transaction allows for a long-term stay and business continuity. The new owner also benefits from the transaction, becoming a landlord with few responsibilities who enjoys a long-term tenant and certain cash flow and investment yield.

Benefits

Banks' grip on financing remains tight, and many small to midsize companies are using sale-leaseback transactions as a two-fold financial strategy.

First, the company unleashes locked equity in its real estate, taking an illiquid asset and creating liquidity. Second, by creating this liquidity, the company makes itself more attractive to lenders and investors by increasing its balance sheet, specifically the debt-to-equity ratio. Freeing this capital also allows the company to quickly redeploy it to expansion, operations or other opportunities. In some cases, a sale-leaseback transaction can allow a company to continue operations, fund payroll or build reserves for longevity.

For example, a multiple-unit Burger King franchisee used a sale-leaseback of one property to pay off a mortgage coming due on another property that the bank would not refinance. Through that transaction, two mortgages were eliminated. By selling site A, the franchise owner paid off site A's mortgage and used net proceeds to pay off site B's mortgage.

Larger corporations also are joining the sale-leaseback ranks. Swedish carmaker Saab Automobile used a sale-leaseback this past June to raise more than $39 million in capital to restart production. Owning real estate assets once was an appealing way for growing corporations to bolster their balance sheets and long-term investments. Momentum is shifting, however, toward creating a smaller footprint with a directive to limit overhead and deploy capital for more-immediate and profitable returns. A company's ability to be nimble and have an exit strategy from a certain geographical market also should be considered.

In addition, under the current Financial Accounting Standards Board rules, a qualified operating lease would not appear on the tenants' balance sheet as either a debt or long-term obligation. Lease payments are 100 percent tax-deductible as an operating expense, but if the company owns real estate, only the interest portion of the debt payment can be deducted. This improves its credit status.

Factors to consider

Triple-net-lease investors and their mortgage brokers should consider a few factors in the underwriting and leverage-seeking process. There are more factors involved with a sale-leaseback than a vacant commercial property. Some factors to consider are:

• What is the status of the tenant's credit? Lenders on sale-leasebacks look at the tenant.
• Is the tenant a publically traded company and if so, what does its rating and balance sheet look like?
• Is the tenant a single-unit franchise owner?
• Is this property easily re-tenanted if it becomes vacant?

There are a variety of other considerations, but it is clear that using a sale-leaseback as a financing mechanism includes further financial exploration by the seller, buyer and lender. Buying this type of asset requires a valuation that is not solely based on the merit of the real estate alone. The tenant's creditworthiness and strength is paramount.

The terms of the new triple-net lease and the tenant's strength are equally important to the underwriting as the intrinsic value of the real estate and improvements. The investor and the lender must be comfortable with the mix of value derived from all these sources.

These are just a handful of factors that brokers and their clients must consider when calculating the capitalization rate and pricing the asset, as well as when purchasing and leveraging an asset.

Business owners are continuing to see triple-net-lease sale-leasebacks as viable and effective forms of financing, and savvy investors are looking to them for passive investment opportunities with above-market yields. Understanding this type of transaction's nuances is key to both sides of the transaction realizing their financial goals. As these deals increase in popularity, commercial mortgage brokers who understand the triple-net-lease sale-leaseback transaction can better position themselves to compete and succeed.

Teal M. Henderson is a broker for Calkain Companies Inc. in its Tampa, Fla., office. Her focus is solely triple-net-leased investment sales with a synergistic approach from the tenant, developer and investor's perspectives. Henderson is also a certified paralegal and has more than 12 years' experience in contract negotiation, loan securitization, mortgage facilitation, real estate compliance and title work. Reach her at (813) 235-5812 or thenderson@calkain.com.