Retail’s New Black May Be The Sale Leaseback
Brinker International has completed sale leaseback transactions for 137 restaurants for $443.1 million.
DALLAS, TEXAS–Earlier this summer Dallas-based Brinker International’s, which owns such restaurants as Chili’s, entered into three purchase agreements to sell and leaseback 143 restaurant properties to Four Corners Property Trust, a REIT headquartered in Mill Valley, CA.
By August it had completed sale leaseback transactions for 137 of these restaurants for $443.1 million. Their approximate net book value was $100.9 million and $61.3 million for building and leasehold improvements. For the net-lease space and even for sale lease back transactions, it was a good-sized deal.
The use of the sale leaseback structure in the retail sector is hardly new. Sears has been selling off its real estate using sale-leaseback agreements for years. At the higher end, Hudson’s Bay has been negotiating a potential sale-leaseback of its Vancouver flagship store for a reported $525 million since May of this year.
But it may be that the structure is becoming more popular among retailers, as Marcus & Millichap predicted earlier this year.
Changes to the tax law at the end of last year–namely the new restrictions on business interest deductions–was expected to inspire more of these transactions, it said in its Net-Leased Retail Research report for the second half of 2018.
Marcus & Millichap noted that companies could start to use sale lease backs “as they shape real estate strategies around lease expenses that remain fully deductible. For owner/users, selling the real estate in which they operate to investors and then leasing it back from them could maximize profitability as well as unlock equity for reinvestment into current operations and funds for potential expansion plans.”
In Brinker’s case the company used the net proceeds to repay borrowings on its revolving credit facility.
Another incentive for retailers to use the structure, Marcus & Millichap said: new provisions in the tax law restrict the deductibility of business interest for companies with gross receipts over $25 million.
By selling the property and leasing it back from the investor, the facility cost once again becomes deductible.