Fluctuating interest rates and tighter credit markets have made it more difficult for retailers to access traditional financing. As financial institutions become more selective about lending, many companies are turning to sale-leasebacks to free up capital while maintaining control of their real estate.
“We’ve definitely seen an increase in sale-leaseback activity, especially among middle-market companies,” says Anthony Cohen, co-leader of Northmarq’s National Net Lease & Sale Leaseback Group. “As banks tighten up lending, sale-leaseback often fills a gap left by traditional financing.”
This option has become a flexible alternative to securing capital in the retail space for those wanting to strengthen their balance sheets, fund growth, or reduce debt without giving up operational control of their properties.
Tapping into Capital While Retaining Control
Cohen explains that a sale-leaseback allows retailers to sell a property and immediately lease it back, with initial lease terms that typically range from 15 to 25 years. This structure gives them liquidity while maintaining control of the real estate that is important to their business operations.
“It’s really a financing tool,” says Cohen. “A retailer receives a large check on day one that can be used for a variety of purposes. They might use it to buy other businesses, purchase equipment, restructure and pay off debt, or improve their balance sheet.”
Growth is a particularly common goal right now, and Cohen notes a recent increase in sale-leaseback activity among convenience stores, gas stations, and auto dealerships. These multisite operators are using capital from sale-leasebacks to support expansion.
For some retailers, sale-leasebacks have also become a primary funding source for merger and acquisition activity. Monetizing owned real estate gives operators the flexibility to finance new acquisitions and expand their market presence without taking on additional debt.
Supporting Future Growth
One of the biggest misconceptions about sale-leasebacks, according to Cohen, is that they are only used by companies in financial distress.
“Many people think it’s a last resort,” says Cohen. “But we’re actually seeing many retailers using it to grow.”
He explains that about 80% to 90% of the time, companies are using proceeds from sale-leasebacks to fund expansion through building new units or entering new markets. He explains that if a retailer is looking to grow its business quickly, owning real estate isn’t always the best use of its cash flow.
For those considering a sale-leaseback, Cohen advises starting every transaction with a clear plan for how the proceeds will be used. “My first question is always, What’s the money being used for?” he says. “It could be to pay off debt, acquire another business, or expand capacity. It just needs a strategic purpose.”
And in a tighter lending market, when that purpose is aligned with strategic sources of capital, retailers can hit their goals in a way that allows for reinvestment in the future and growth of their businesses.
Visit Northmarq at ICSC NEW YORK, booth 311 on level 3.
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