Retail sale-leaseback deals are on the rise. Retailers are using the transaction structure to unlock capital tied up in real estate and as an alternative to financing. On the capital side, retail investors are chasing these deals, particularly for triple-net lease structures.
“There can be several drivers, but they all relate to unlocking capital from real estate for other uses. One driver is the use of this structure as an alternative to financing,” David Swartz, a partner at Crosbie Gliner Schiffman Southard & Swanson LLP, tells GlobeSt.com. “With interest rates still low by historical standards, use of a sale-leaseback structure as a financing mechanism is not as prevalent as it was in the past. Another driver of this activity in the retail arena relates to when a retail operator owns several sites but, because of financing or other concerns, finds it advantageous to monetize its real estate by creating a separate property ownership entity and separate operating entity whereby the land is transferred to the property entity and leased back to the operating entity. As a second step, the land-owning entity is then sold to a third party.”
Safco Capital Corp. recently acquired a retail lot with a 17,833-square-foot Gelson’s Market in a sale-leaseback deal with Gelson’s. The deal was a great example of the latter trend where retailers create a separate property ownership entity. “The Gelson’s transaction is a simplified version of this,” says Swartz. “Another similar driver—again relating to retail—is to take advantage of compressed cap rates since quite a bit of 1031 money is available to buy properties leased to triple net credit tenants. As such, a credit worthy chain retailer can unlock capital by selling and leasing back its freestanding pad real estate. This seems to be an area of ongoing activity.”
There are several good candidates for a sale-leaseback deal, but in general, Swartz says retailers with strong credit, like the Gelson’s deal, or retailers that can benefit from the sale-leaseback structure. “The sale-lease back structure can have applicability to companies who have a reason to build their own facility and but who ultimately prefer to be a tenant rather than an owner for balance sheet reasons,” says Swartz. “An analogy would be a reverse build to suit lease—instead of the landlord building to the tenant’s specifications, the tenant as owner builds itself and then sells and leases back from the landlord entity.”
While demand for sale-leaseback transactions have already been increasing, Swartz expects demand will remain strong through 2019; however interest rate trends will have a big impact. “Pressures in brick and mortar retail might lead to more sale-leaseback transactions in an effort by the retailer to free up capital for operational needs,” he says. “But if interest rates continue to remain stable, I would not expect this trend to grow dramatically.”