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Sale-leasebacks turn favorable for operators


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New buyers for properties, low cap rates and lenient lease guarantees are just a few reasons why sale-leasebacks look better to sellers these days. Our guest columnists explain the ins and outs.

Over the years, franchisor and franchisee operators have used the sale-leaseback of retail properties as a logical and useful strategy to free up capital that would otherwise be tied up in owned property, while continuing to control the location for decades.

That unlocked equity can then be immediately re-deployed for uses that are more directly related to the core competencies of the business, without the lender oversight or limitations that can come with loan covenants.

Historically, sale-leasebacks have not been without drawbacks for the operator. Particularly during the Great Recession, portfolios of single-tenant, triple-net-leases retail assets were being acquired in bulk at low prices. It was very much a buyers’ market.  

As demand for single-tenant properties, like those of many franchised concepts, increases, a transition has occurred that is much more in favor of the seller. In the current environment there is a new strategy that provides franchise operators with more room to maximize their initial property sale, as well as more flexibility with lease terms once the property has sold. 

Five reasons to take a look

The following are some of the key factors that make this an ideal time for franchise operators to enter into a sale-leaseback situation.

1. New buyers: A new kind of investor is specifically targeting single-tenant, triple-net leased retail properties. These investors are small family offices, family trusts, private investors, 1031 asset exchange buyers and foreign investors. They are also willing to pay a higher price for one property or a smaller group of properties than large investment companies seeking to acquire larger portfolios for a discounted or “bulk” rate. 

Smaller investors like the long-term, low-maintenance ownership benefits of well located properties with successful tenants. They also like the fact they can diversify their portfolio with tangible property as opposed to having all their investments in stocks and CDs. Essentially they are willing to pay a premium for these ownership benefits.

2. Low interest rates: We are still seeing historically low interest rates. Buyers are willing to pay more as overall interest rates and alternative yields are low. Many investors, however, are choosing to pay all-cash for properties, which is even better when it comes to a quick, certain closing for the seller.

3. Low capitalization rates: A cap rate is a rate of return on a property based on its expected income. It is used to estimate the investor’s potential return on his or her investment by dividing the income the property will generate by the total value of the property. We are seeing cap rates rather low right now as compared to years past. 

In many of our recent sale-leaseback transactions, buyers are looking at anywhere from a 4 percent to 6 percent cap rate. A 6 percent cap rate is what they are making as an annual return on the property. Despite cap rates being historically low, private investors are willing to pay a premium for sale-leasebacks due to their long-term stability, and as a trade-off for a favorable interest rate. Never before have we seen cap rates as low as 4 percent and 5 percent for sale-leasebacks, which is where many are currently trading. 

4. Lease flexibility:  Pre-recession, retail property landlords were also able to write specifics into their own standard leasing documents that weren’t retailer-friendly. Franchisees were locked into ownership lease terms without much say. Rental increases and rental increases based on income were pretty standard. 

Now, as smaller, private investors enter the arena, they also allow more flexibility and customization based on historical growth, geography and local demographics. Often, operators use their own lease documents, and these are without personal guarantees. 

5. Lenient lease guarantees: Faris Lee recently completed individual sales of 15 Golden Corral restaurants in several states. The franchise operator who was doing a sale-leaseback of the restaurants was able to utilize a subsidiary entity for the lease guarantee, as opposed to the entire corporation, which operates hundreds of stores. Many smaller buyers are more accepting of what is called a “limited guarantee.” This more lenient lease guarantee helps take some of the pressure off the operator and its franchise.

Insulate value, tap ‘vast’ pool

Whether you are a small franchise operator with one to 20 stores, or a larger operator with 100-plus stores, the laws of individual sale ultimately command higher sales proceeds, lower cap rates and move favorable lease terms. 

In this post-recession economy, by selling properties individually and tapping a new buyer profile, value is insulated and the seller is opened up to a vast buyer pool, resulting in higher proceeds per unit and lower cap rates. That meets the needs of both seller and buyer. 

Richard Chichester is president and CEO and Matthew Mousavi is senior managing director of Faris Lee Investments, a retail advisory and investment sales firm. Reach them at rchichester@farislee.com or mmousavi@farislee.com.

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