Jonathan Schiffer – 7/18/2023
Real estate owners who are actively engaged in operating their business often face the financial decision between a sale-leaseback transaction and refinancing. Each option carries its own benefits and considerations. In this article, we explore the key factors to consider when pursuing a sale-leaseback, or a refinance of their single-tenant net lease properties.
Sale-Leaseback: Unlocking Capital and Reducing Risk
- Capital Infusion: Selling the property generates capital for reinvestment or strengthening financial position. This additional capital not only creates the opportunity to re-invest into the operation of one’s business, but also to pursue separate investment avenues with flexibility. It’s often a lower cost-of-capital than current refinancing options on the market in 2023.
- Risk Mitigation: Transitioning to a tenant role reduces operational risks and shifts property ownership to the buyer. In a NNN sale-leaseback, the tenant assumes responsibilities such as property taxes, maintenance, repairs, and insurance. This transfer of obligations reduces the buyer’s exposure to potential financial burdens, while allowing the tenant to freely run their business.
- Lease Flexibility: Sale-leaseback transactions offer the opportunity to negotiate favorable lease terms that align with the tenant & owner’s long-term goals. This flexibility allows for customized agreements, including rental escalations, renewal options, and other provisions that contribute to stable and predictable cash flows. By structuring the lease to meet specific needs, owners can secure consistent income while Tenants can utilize the immediate capital from sale.
Refinancing: Leveraging Equity and Enhancing Cash Flow
- Equity Utilization: Refinancing allows owners to leverage their equity, which is likely to have built up over time. Tapping into one’s equity allows for property improvements, debt consolidation, or other investment opportunities, all while retaining ownership and allowing for continual appreciation.
- Interest Rate Optimization: Refinancing can create more favorable loan terms, potentially lowering monthly mortgage payments and increasing cash flow. If lower interest rates are achievable, owners can take advantage of market conditions and lock in better loan terms. The returns from ownership can increase efficiency and create greater cashflow from their NNN property.
- Ownership Retention: By opting for a refinance, owners maintain control and will continue to benefit from potential future appreciation. This allows for long-term wealth accumulation, personal management of the property, and flexibility towards a disposition decision in the future.
- Long-Term Goals: Assess your long-term objectives and align your ownership objectives accordingly. Factors like liquidity, alternative growth opportunities, and risk tolerance will help determine your direction.
- Financial Implications: Analyze tax consequences, transaction costs, and ongoing cash flow considerations. Decide whether the capital from sale is worth the long-term lease and management expenses found in a NNN lease.
- Market Conditions: Assess interest rates, property valuations, and investor demand for net lease assets. A good relationship with a lender only goes as far as what the market allows.
If one thing’s for certain, 2023 is a volatile year for lenders and borrowers alike. While interest rates appear to remain inflated over the next 12 months, sale-leasebacks remain a creative way to access money at a cheaper cost-of-capital. Choosing between a sale-leaseback and refinancing for single-tenant net lease properties requires careful evaluation, and owners must consider their long-term goals.
RealSource Group has assisted some of the nation’s largest operators & institutional clients take advantage of sale-leasebacks, allowing them to relinquish ownership of their real estate, and re-invest the proceeds toward their business operations.
Disclaimer: This article is for informational purposes only and should not be considered as financial, tax, or legal advice. It is recommended to consult with professionals to determine the suitability of any investment strategy or transaction.