Establishing The Sale Price And Rental Rate For A Sale-Leaseback
The purchase of a leaseback is similar to evaluating any real estate asset with existing tenants when assessing the purchase. With existing tenants, the rental income is fixed because of the leases in place. A sale-leaseback allows each party to negotiate the rent and other terms. This ensures that the terms of the lease and the sale price can be tailored to the seller and buyer's needs.
The amount of rent that the tenant has paid is an important factor in any real estate valuation.
The Delicate Dance Between Rent And Sale Price
Rent is a key factor in determining the asset's value or sale price. The higher the rent, it will be. One scenario is that the seller and future tenant might agree to very high rents in order to increase the sale price and maximize the asset's value. However, the buyer in this scenario is motivated to purchase the asset at a fair price and will have to weigh the benefits and drawbacks of paying higher rents.
Although it may seem like a benefit for the buyer to get above-market rents, is that sustainable? Will the owner be able achieve similar rents after the tenant moves on? The length of the lease is another consideration. The upfront cost might be justified if the lease term is longer than ten years and the rents are higher than the market.
The seller may agree to a higher rental rate to validate a higher sale price and generate more cash upfront. However, the monthly lease payment for the future might be more expensive than they can afford due to other business expenses and strategic priorities.
However, if the seller and future tenant agree to lower rents, the asset's value (and the amount received by the seller) will be lower. Therefore, the seller must weigh the pros and cons of making more money from the sale against the higher monthly rent payments.
Market Knowledge: The Benefits
In a sale-leaseback transaction, the seller and the tenant set a lower-than-market lease. It resulted in a lower-than-market sale price which was attractive to the buyer. This is partly because the seller knew the market and saw the potential.
The lease below market was for five years which is a short period. However, the investor understood the market dynamics well, who believed that the space could be leased at market rate, significantly increasing the returns once the lease ended.
The most critical value consideration that will determine the selling price is the underlying lease. While many factors can be considered, it is the cashflow, term length, and underlying tenant credit that people really consider.
Beyond the length of the lease and creditworthiness, factors to consider include flexibility and reusability and solid location. This is more art than science. The buyer must balance rent and price with long-term ownership considerations. Sellers will not have to take these risks.
