Will Sale-Leasebacks Continue Ticking Up?

MIAMI—There are pros and cons to sale-leasebacks. Before you move forward, you'll want to get the advice of a seasoned commercial real estate pro and an attorney.

GlobeSt.com caught up with Ankur Gupta, corporate advisory partner in the Chicago Office of McDermott Will & Emery and a member of the firm's real estate group, to get his take on some of these issues—and give you something to think about—in part two of this exclusive interview. You can still read part one:

GlobeSt.com: When are sale-leasebacks the right option? What factors influence this tactic?  

Gupta: Sale-leasebacks can be the right option at any time, depending on an examination of numerous factors such as projected long- and short-term capital needs, the existing cost of capital for corporate credit facilities, current cap rates for the real estate product type and market, consideration as to whether the subject owned properties are fully- and efficiently-utilized, and contemplated geographic expansion, contraction or diversification.

GlobeSt.com: What are the challenges of sale-leasebacks?  

Gupta: One of the challenges in sale-leasebacks is getting companies comfortable with the threshold understanding that entering into a sale-leaseback transaction does not mean that a company is giving up control with respect to its real estate. To the contrary, companies can tailor the sale-leaseback terms to their particular needs by examining factors such as its projected long- and short-term growth, cash flow needs and geographic expansion, contraction or diversification and structure their real estate lease to provide them the appropriate flexibility to address those factors. By continuing to own the real estate, companies may find themselves using more expensive capital to fund their growth and tied to their existing physical facilities subject to the market determining how and when the company could eventually exit that real estate.

GlobeSt.com: How do you overcome those challenges?  

Gupta: Most challenges can be overcome by a company examining factors such as its projected long- and short-term growth, cash flow needs, geographic expansion, contraction or diversification and structuring their real estate lease to provide them the appropriate flexibility to address those factors.

GlobeSt.com: Do you expect to see more or fewer sale-lease backs in 2014?

Gupta: We expect to see a continuing increase in sale-leasebacks in 2014 and beyond, particularly if there is a rise in interest rates applicable to corporate credit facilities and if the trend of increased foreign investment in the US real estate markets continues. A rise in interest rates applicable to corporate credit facilities would serve to stimulate companies to examine more cost-effective alternate sources of capital, and continuing foreign investment in the US real estate markets would serve to drive more competition into the real estate marketplace, allowing companies to maximize the liquidity available by monetizing their owned real estate and/or ensuring that their lease instrument provides them with the appropriate flexibility to facilitate their long- and short-term objectives.