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Leaseback deal makes its mark in real estate
Both investors and building owners are reaping the benefits.
The sale-and-leaseback deal is becoming the new best thing in commercial real estate because market conditions and the lending situation are making these transactions good for the buyer and for the seller, both nationally and in West Michigan.
The Easy Leaseback division of Sperry Van Ness recently completed a sale-and-leaseback of a large manufacturing facility in the region. As usual, the transaction was done on a confidential basis. The listing drew seven offers from investor groups across the country and the deal closed in just 60 days.
The group took ownership of the facility and was able to put its investors in a situation where they’ll earn a decent return on their money. In turn, the manufacturer got the cash to invest in the business and a 20-year lease to continue operations at its current location.
“The deal is pre-set, so they are not buying speculative real estate that they have to lease out. So they know their income stream, they know their asset, and it’s pretty much a fixed, low-risk transaction,” said Peter Colvin, chairman of the Sperry Van Ness National Single Tenant Team, of the advantages of sale-and-leaseback to a buyer.
The buyer checks out the seller’s financial situation before making an offer, and if it’s determined the seller will be in business for the length of a proposed lease, then the deal goes forward. Once a deal closes, the buyer gets the steady income a lease offers and also captures the sought-after return.
“So they feel they’re going to get paid and they’re going to get paid the return they agreed to. They’ve raised money from investors or shareholders so they have to reinvest it because they promised their shareholders, say, a 7 percent return. While the money is being raised, it’s sitting in a bank account and making about 1 percent at most,” he said. “So they’re motivated. They have to buy and they’re looking for the safest investment deals they can get.”
Colvin, his son, Chris, and Dave DeMaagd of Sperry Van Ness/Silveri Co. in Grand Rapids and two members of the Sperry Van Ness Chicago office started the Easy Leaseback business.
As for sellers, they typically don’t want to be owners anymore after what they went through during the recession when the value of their properties fell by as much as 30 percent. A sale-and-leaseback deal also gives a seller a chance to cash in on a property’s equity at a time when a building’s value has rebounded.
Colvin said a seller can take that cash and put it into the business and make a nice return down the road from the investment. He added some sellers will use that money to wipe out their debt.
“We have people who just don’t want to be in debt anymore. They’ve run through the last few years of challenging banking and lots of meetings. They want to sell the real estate, pay off all their debt and be out of debt. It’s freedom,” he said.
Colvin said the reason this type of transaction has gained momentum among sellers is because real estate values have risen quickly and are continuing to rise.
“Buildings may be worth 25 to 30 percent more than they were a year-and-a-half ago. Some owners who have held a building for 10 years or so have seen their equity drop (during the recession) and don’t want to go through that cycle again.”
Buyers are looking at doing these deals because the interest rates on loans are still quite low. So higher property values combined with low-cost financing are driving the deals. “Investors can get really good financing, which allows them to pay more for these properties and get the returns they want,” said Colvin.
“It’s a real hot market. It’s like the perfect situation: There is a bigger supply; then there is a bigger demand than the supply of good lease assets right now. These (assets) are scarce and investors have to reinvest the money.”
Colvin said investment groups, such as private and public REITs, literally have billions of dollars to invest and they’re not only looking at industrial real estate. He said the retail market has also drawn attention. His team was involved with IHOP purchasing the Applebee’s chain of restaurants. IHOP created a new equity firm that sold 200 Applebee’s to a private equity group and then leased the locations back. The local Silveri team completed 30 of those transactions.
The team also did a sale-and-leaseback transaction for Don Pablo’s Restaurants in Indianapolis. “The Easy Leaseback did a great job for us in selling our corporate-owned real estate. They were astute advisors,” said Don Pablo’s CEO Paul Seidman.
Besides manufacturing and retail, Colvin said hospitals are primary candidates for this type of real estate transaction and are very popular among investors. “(Hospitals) all seem to do well financially. They’re a business that’s trending long term; you’ve got to have medical and you’ve got to have hospitals,” he said.
“They have a good support system, good management, and it’s usually good real estate — just attractive real estate. So someone will pay $300 million for a good hospital and do a 20-year leaseback to the hospital, which becomes the tenant.”
In addition, hospitals are merging. When one buys out another, it becomes a good time to sell some of the real estate and some of the medical businesses to cut duplication, and the two deals create more value for the purchasing hospital.
Colvin also said the transaction works well for single-tenant office buildings, including doctor groups that own their locations.
Whether the sale-and-leaseback deal will remain a hot real estate commodity for the immediate future depends on two factors: one, that the business climate continues a steady, upward climb, and two, that the cost of debt doesn’t rise very much.
“Right now, it’s just really a smart thing for a company to do. If they’re planning to sell within the next five to 10 years, this is the time to do it. There is a real pent-up demand that is being appreciated now and this is where people want to invest their money, so this is a perfect situation,” said Colvin.
“So we’ve got another six to 12 months of this and then it could slow down a little bit, or the prices could go down a little bit. This is the peak right now. These are fun times for everybody.”