Economic Conditions Ideal for a Sale-Leaseback Strategy
It's a more beneficial financing mechanism for businesses than borrowing against their balance sheet.
In today’s higher interest rate costs, for the first time in many years, there’s a condition where the financing alternative of sale-leaseback is superior to the borrowing options that a company might have, according to Alan Pontius at Marcus & Millichap.
The firm’s senior vice president and national director of industrial, and healthcare divisions, speaking on a company news video, said the borrowing rate for the leaseback, or the cap rate, is many times less than the corporate borrowing rate, or the business borrowing rate, for the enterprise.
In other words, if the borrowing rate is 10%, but the owner could sell the building and lease it back at 8%, that’s a 200-basis point spread, and obviously a much more beneficial financing mechanism for the business than borrowing against their balance sheet, according to Pontius.
An alternative, or at least an alternative use for the equity capital that’s tied up in a building, is for business expansion, he said.
“Many times, the opportunity for the business is there to expand location, or even make capital improvements to the facility they’re in,” Pontius said. “And oftentimes, the solution to finding the capital needed is to sell the property, get the equity that was tied up in the property, and redistribute that equity into the business options for expansion, or business improvement, or capital improvements, that are on the table for that business.”
This way, he said, the company continues to control the asset, as a tenant, for as long as they want – whether it be a 5-year term, a 10-year term, a 15-year term, or whatever options might be built into that agreement.
“It’s a terrific way for a company to tap underutilized equity and either pay down debt, use it as a debt alternative, or use it to finance capital improvements designed for the business,” Pontius said.
Sale-leasebacks have been used by companies, big and small, for many, many years as a vehicle to expand business, pay down debt, or look at alternatives that the equity in a building can provide.
The bottom line today, Pontius said, is that interest rates have risen substantially, and this has opened, significantly, the level of conversations today about it being a great source for alternative financing.