Is the time right for a sale-leaseback? The current state of the capital markets and an influx of capital have created a prime situation for such a transaction, writes a real estate finance expert.

• Author: Levin, Gerald J.
• Position: Real Estate - Analysis

Corporate America owns an estimated $2.3 trillion of non-specialized "investable" real estate. Yet historical returns from equity investments have consistently exceeded those of real estate. As a general rule, any dollar that can be "monetized" or sourced from the sale of corporate real estate and reinvested in that company's listed stock would create positive leverage. That's why any CFO whose company owns real estate should consider a sale-leaseback transaction.

Although they have been used for more than 50 years, many companies do not fully understand how sale-leasebacks work--or the benefits they can offer to corporate investors. In it simplest form, a sale-leaseback entails the sale of corporate real estate and the simultaneous commitment to a long-term lease, generally 15 years or longer. This combination allows a company to redeploy the capital invested in real estate into the core business. Even if you believe your firm currently has sufficient capital, sale-leaseback financing can enhance the efficiency of your company's capital structure.

Because a corporation is both the lessee and the seller, it has greater bargaining power than would an average tenant in a typical lease negotiation. The seller-lessee can use that leverage to maintain uninterrupted control of its facilities, including operations, maintenance and alterations. It can also negotiate the rights to assign and sublet the facilities, as well as to enjoy lengthy initial and renewal terms. Depending on a company's specific needs, it may choose to divide a sale-leaseback into separate leases with differing terms, rents and covenants.

Why Now?

Although interest rates have begun to creep upwards, initiating a sale-leaseback now can help secure long-term capital at historically low rates. It's also especially compelling due to the recent decline in equity markets, which has diverted more institutional capital to corporate fixed-income assets, compressing corporate spreads to historically low levels. Moreover, the real estate yield curve that measures the margin between the cost of debt and the cost of equity is inverted.

This rare and likely temporary phenomenon means that equity dividends are actually less than equivalent debt costs for many components of institutional real estate investment. Since most sale-leaseback investments consider both debt and equity markets, the ultimate lease cost to a CFO today could be the lowest it has ever been.

In addition, large amounts of...