3 Reasons Why Businesses Will Utilize Sale-Leasebacks To Battle COVID Cash Crunch
By: Luke Timmis, Director of Investment Division, Signature Associates Commercial Real Estate/TCN Worldwide in Detroit
As COVID-19 has thrown the world into uncharted territory, businesses across the globe are finding ways to create liquidity and fuel a comeback. Corporations with owned real estate, however, have a unique advantage to extract capital at above-market pricing for its properties by utilizing sale-leasebacks.
Below are three reasons why businesses are turning to the sale-leaseback to create liquidity and battle the COVID Cash Crunch: 1. Highly Competitive Sale-Leaseback Investor Market with Robust Pool of Sophisticated, Institutionally Capitalized Buyers. Institutional real estate investors, specifically private/public REITs (Real Estate Investment Trusts), have displayed a voracious appetite for sale-leaseback transactions the last five years. Due to the intense competition for sale-leasebacks, all buyers participate with a high level of urgency, offers are presented without financing contingencies, and sellers are ensured a strong confidence of closure. The Signature Associates Sale-Leaseback Team has been the leading platform nationally with $100 million of transactions closed in Q1 2020. 2. Liquidity in Three Months, Guaranteed; 90-Day Process from Marketing Launch to Closing Date. The Signature Sale-Leaseback process includes marketing (5 weeks), purchase agreement negotiations (10-14 days), due diligence (30 days), and closing (10 days). The marketing period concludes with a highly competitive bid process generating anywhere from 5 to 20 offers from institutional real estate investors (primarily REITs). Signature’s Sale-Leaseback Process has been streamlined to secure 90-day liquidity for businesses, utilizing practices and procedures from $1.2 billion of closed transactions nationally. 3. The Ultimate Recapitalization Tool for Preserving Equity and Avoiding Bank Debt. Refinancing property is also a common practice when an infusion of capital is needed. However, there is a value discrepancy between sale-leasebacks and appraised value. The proceeds generated by a mortgage on the property would only amount to 50%-60% of appraised value, especially as lenders are more conservatively underwriting during the COVID crisis. Sale-leasebacks typically generate a premium to appraised value because the price is driven more by business financials than building quality/location valuation metrics utilized by appraisers. The sale-leaseback provides liquidity from a hands-off real estate landlord instead of burdening the business with covenant-ridden bank debt.
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