What is a NNN Sale-Leaseback?
NNN sale-leaseback investments can be ideal for the first-time buyer or savvy investor as a passive investment opportunity with reliable income and above-market yields. In a sale-leaseback, a corporation or entity sells its property and/or building yet remains the tenant and maintains control of the site and operations. At closing, the corporation will “sell” the property to an investor and “leaseback” the space with an absolute NNN lease, thereby becoming the tenant.
With most sale-leasebacks, the buyer becomes the property owner of an already thriving business with a long-term, high-credit tenant and little-to-no responsibility. Rent is usually based on historic profitability using actual measurable figures and predictable forecasts. Additionally, future rent increases are locked-in so both tenant and landlord can accurately predict future cash flow. Typically, a sale-leaseback presents more financial clarity, lower risk than a new investment, a steady cap rate with reliable monthly income, and financial and tax benefits.
Why Would a Company Sell the Property and Stay?
A company or corporation that owns many properties may decide it wants out of the “real estate” business altogether to free up capital for growth or debt elimination. Sale-leaseback transactions can effectively reallocate risk, eliminate debt, and create capital for more locations or development in other areas, such as technology or distribution. With a lease on the same property minus the mortgage debt and illiquidity, the tenant remains in the community with a long-term lease guarantee and continuity, and may:
- Release locked equity from the ties of illiquidity.
- Use freed capital for quick expansion, operations, or other opportunities.
- Improve creditworthiness.
- Become more attractive to investors, buyers, lenders by improving debt-to-equity ratio.
- Create a smaller footprint and limit overhead for more reliable, profitable returns.
Many corporations see the advantages of not owning a bunch of land and buildings, and instead, use their capital for more aggressive revenue-generation. There is very little, if any, downside of a sale-leaseback for either party – it’s a win-win for the investor and the tenant.
NNN Investor Sale-Leaseback Considerations
The NNN investor who understands a sale-leaseback transaction is better positioned to succeed and build a portfolio of properties that fit his or her goals.
The key here is “to understand” the sale-leaseback investment, which has many more considerations than a vacant commercial property. One of the first considerations is why the tenant or corporation wants to sell. Are they in financial trouble or freeing capital for expansion? These are two very different scenarios for the investor who wants a stable, 10-20-year absolute NNN lease. Others include the strength of current business and forecasts, location, lease terms, and tax benefits.
Factors to Consider
- The real reason the corporation or tenant is selling.
- The status of the tenant’s credit and the specific location’s sales and performance figures. This is essential to move forward.
- Cap rate and sale price.
- Is the tenant a publicly traded corporation; are they strong?
- The overall value of the real estate and mix of values derived from several other sources.
- Whether the tenant or company is a single-unit or multi-unit franchise owner.
- The length of the lease and other lease terms and clauses – do they fit your goals as an investor?
- Is this property in a prime location and easily re-tenanted if it should become vacant?
- Does the property qualify for the cost-segregation depreciation (CSD) tax benefit?
- Will a possible 1031 exchange work for this property?
Why You Need a Buyer’s Advisor
To gain access to as much information as possible, learn the intricacies of a sale-leaseback transaction, and ensure a favorable outcome, it is wise to partner with a NNN buyer’s advisor. An advisor will help you investigate and inspect the tenant’s motives and viability, access in-depth information, and remain objective throughout the transaction.
Should you partner with a Westwood Net Lease Advisor, for example, you’ll benefit from decades of industry expertise and market knowledge that covers every scenario and type of NNN investment, all at no cost to you. Our team works on your behalf to examine the transaction in great detail and get you to the closing table smoothly.
To Wrap It Up – A NNN Sale-Leaseback is a Wise Investment
Within the consistently strong NNN lease market, the upward trend in sale-leasebacks continues and may be a wise investment option for you if it fits your financial and lifestyle goals.
We encourage you to investigate the possibility of a sale-leaseback but try not to sort through it on your own. Let a Westwood Net Lease Advisor help you find a selection of properties that fits your criteria and navigate the complex process with ease. By partnering with one of our buyers’ advisors, you get a personal representative with decades of NNN knowledge and sale-leaseback expertise. Contact us today for a free consultation, 314-997-5227.