A sale-leaseback occurs when an owner of the real property decides to monetize it. They live in the property and then rent it out to a landlord. The tenant becomes the landlord.

Over the past few years, industrial assets have seen a surge in sale-leaseback transactions. There is also a growing interest from around the globe for North American industrial properties.

This is not a new trend. This sector has seen record-breaking levels of investment activity and low vacancies. These factors, which were exacerbated by the pandemic, have created an exuberant investment environment.

Industrial users are also increasingly taking notice of this enthusiasm.

Industrial users are more likely to own their buildings than their retail or office counterparts. While most commercial and office properties are designed with multiple tenants in mind, one user often uses industrial properties. In addition, industrial properties can be heavily customized to suit specific manufacturing or logistical needs.

Industrial users realize that they can have their cake and eat it, too. Industrial users are discovering that they can still enjoy the benefits of selling their buildings at record prices while maintaining occupancy and use.

A Chance For Industrial Users To Acquire Capital And Flexibility

The industrial user can reduce the benefits of a sale/leaseback transaction to just two concepts: flexibility and working capital.

Most industrial users who own their property have some form of financing. They may have a loan of 50% or 60% or 70% of the building's appraised value. They can use the operating capital they receive to invest in the business, such as for equipment and materials purchases.

A sale-leaseback transaction allows a user to take 100% of the property's value and then reallocate the capital to other areas of their business. This could greatly improve the company's balance sheet, depending on how they manage their accounting. So while you can reduce your debt, you can also reinvest in your business.

The asset is still available to the company. The user makes a lot of money from real estate and can continue to use the property the same way as before. Industrial users also have greater flexibility by trading their real property assets for a leasehold obligation. It is not an inliquid asset.

Due to record-setting industrial investments and historic low-interest rates, this can be a great time for industrial users to surrender ownership of their facilities. Unfortunately, this means that the cap rate could rise with interest rates rising in the near(ish).

Cap rates currently range from 4% to 7 percent depending on where and what the facility is located (more details in a moment). He was even aware of the sub-3% cap rate on the coasts.

Although it may seem like an ideal scenario, an industrial sale-leaseback deal can be a good option for both the buyer and the seller. One thing is that most industrial users are not experienced in real estate and need to evaluate all possible suitors carefully. It is important that the user doesn't speak to anyone who knocks at their door.

A traditional investment sale process usually results in better terms for the owner, both for the sale and subsequent lease. We are always amazed at the improvements in terms as we go about finding assets for sale.

It is also crucial to find the right investor for each industrial user. This is often their only place, and it is critical for the [tenant/seller]. Having an owner who isn't thoughtful or caring about the user can also be a problem. You need to find the right match.

Industrial users must also be comfortable with the fact that they are giving up control by entering into a sale/leaseback transaction. This adjustment can be difficult for users who are used to being the sole owners of their properties. There are good reasons to believe that prices will continue to rise, despite the frenetic industrial sales market.

Due to the lack of steel and lumber, and the difficulties in getting them, there is a limit on how much development can occur. Scarcity pricing is also continuing to be driven by a limited supply of assets.

The viability of an industrial user's sale-leaseback transaction will ultimately come down to the company's priorities and whether they value flexibility and working capital over security.

The calculus for investors is riskier but can be equally rewarding.

Do Your Research On An industrial Sale-Leaseback Opportunity

W.P. Carey is the most experienced property owner in industrial sale-leasebacks. This has been the firm's main focus since its founding in 1973.

Sale-leasebacks for industrial buildings are our bread and butter.

W.P. was intrigued by these investments. Carey: The facilities are often very crucial to the company doing the sale-leaseback and that's why we were interested in these investments. We're long-term holders and want to own something the company plans to use for a long time.

In an ideal scenario, W.P. Carey's investment thesis seems very simple. Together with the equity investors, we are betting that the company will be successful over a long time. If we are correct, we will collect rent for a primary lease term of 15 or 20 years for starters and possibly [execute] renewals.

What happens if they are wrong?

It all depends on the market and assets involved. High-end properties, such as biotech or food manufacturing facilities, pose a higher risk than generic properties like last-mile fulfillment centers. This risk is greater in smaller markets, but it is slightly less in larger ones.

His first section includes elements that are consistent across all real estate deal types and asset classes. He recommended that potential investors order an environmental phase I (and a Phase II study if necessary) and have an engineer inspect the property to assess its structural integrity. Finally, he reviewed the title and survey.

You must ensure that you are purchasing a piece of clean real estate.

The next step is to review the company that will sell you the property.

It is important to fully understand the industry and the company's place within it. Also, you need to know about any potential threats to the industry or the company. It is essential to examine the credit to understand the reasons the building is so important for the company and to determine the company's financial outlook in the short, medium, and long term. It is important to review the balance sheet of the company. You should examine their attitudes towards leverage and how they've fared in downturns.

This process shows that a sale-leaseback transaction can be more than just a real estate deal. It's more like creating a long-term, mutually-beneficial partnership.