The Value of Sale-Leaseback Investments in an Economic Downturn

Jul 21, 2022

Should you purchase a sale-leaseback property in an inflationary market? The answer depends on your financial goals, but for many real estate investors, it is an attractive opportunity that offers contractual income, a tangible asset, capital preservation, wealth building, and less worry about inflation, all highly appealing attributes in any economy.

What is a Sale-Leaseback?

A sale-leaseback is a real estate transaction in which a business owner, developer, or corporation sells its property to an investor and leases it back with a long-term, triple net lease, keeping control of operations while becoming the tenant.

Sale-leaseback properties are known for being stable investments that typically offer above-market yields. They usually carry less risk than gross lease properties but have slightly higher cap rates (currently 6.00–8.00%) than other NNN properties.

  • As the buyer, you purchase the land and building (or just the land) of an established business with a high-credit tenant who wants to stay.
  • The lease, usually an absolute triple net lease with no landlord responsibility, ensures you earn contractual income for 10–20 years (ground leases can be as much as 50–99 years).
  • Rent is typically based on historic profitability using actual measurable figures and educated forecasts.
  • Locked-in future rent increases fight inflation and ensure both tenant and landlord have fixed costs and predictable income.
  • Most often, you can deduct the property’s depreciation expenses from your income taxes.

Some absolute NNN lease properties are sold by their corporations and leased back, including gas stations and convenience stores, fast-food restaurants and QSRs, early childhood development centers, car washes, and more.

Green gas station and store lit up at night

Sale-Leasebacks in the Current Economy

Sale-leasebacks have been a popular type of real estate investment for ages, but there has been increased activity in 2022 for several reasons, mainly companies needing post-pandemic operating capital and investors redistributing their capital from other, more volatile investments.

Historically, in an economic downturn, demand for hard-asset investments with inflation protection increases. Triple net lease properties, such as Dollar General, Walgreens, and 7-Eleven are great examples. Sale-leaseback deals are also proving especially attractive to buyers in this unpredictable economy because they rival or exceed the internal rate of return (IRR) of less reliable investments.

“Business owners and corporations see the increased interest from sale-leaseback buyers and their available capital as an opportunity to cash in and expand their businesses while not losing value. Companies that may not have considered a sale-leaseback before the pandemic are hedging against risk with their liquidity before the market changes and spreads widen. Real estate investors are buying now to avoid a potentially higher cap rate spread and turning to leasebacks for the stability,” said Vince Vatterott, Westwood Net Lease Advisor.

Though the market will likely see a momentum shift in Q1 2023 as it adjusts to higher interest rates, higher cap rates, and more discerning buyers, those still interested in sale-leaseback investments may see less competition for properties and benefit from tens of thousands of dollars of predictable monthly income.

If you are considering purchasing a leaseback property this year, or as part of the 1031 exchange, do not wait. The market is tight, demand remains high, and there are sweeping changes proposed to the 1031 exchange rules as of January 01, 2023. Read more about those changes here.

As of Q1 2022, leaseback transactions increased 190% YOY and first quarter 2022 saw $8.4B in leaseback deals, with industrial properties making up around 45% of total sales.

Risk meter with the needle on low

What Are the Sale-Leaseback Risks?

There is an inherent risk in any investment. The uncertainty of global events, inflation, rising interest rates, a tense and changing political climate, and decreasing GDP growth are all factors we’re watching closely. However, when compared to other types of commercial real estate and stock market investments, even in a down economy, sale leasebacks are lower-risk with long-term contractual monthly income and solid returns. There is a tangible asset and a lease guarantee backing the investment, which tempers the unpredictability of other investments in your portfolio.

To minimize your risk, perform thorough due diligence before you purchase. As the buyer, you must understand the investment. Is the company in financial trouble or freeing capital for expansion? These are two very different circumstances that impact stability.

Other factors to understand include the strength of the current business segment and forecasts, lease terms, and location – is it easily re-tenantable? Also, meet with your financial professionals to determine possible tax opportunities.

How to Find a Sale-Leaseback Investment

How do you find a sale-leaseback property in this competitive marketplace? It is nearly impossible to do so on your own. When you engage a Westwood Net Lease Advisor who knows the nationwide market well and is well-known in the industry, we learn your goals and find the right investment for those goals. We help you investigate and inspect the tenant’s motives and viability, access in-depth information, and remain objective throughout the transaction.

If you are utilizing the 1031 exchange to purchase a sale-leaseback property, then time is of the essence. The minute you close on the sale of your property, the clock begins ticking. Our 1031 specialists will walk you through the complex process with ease and get you to the closing table within the tight 1031 timeline.

Sand of time glass timer

To Wrap it Up – Sale-Leaseback Properties: Solid Recessionary Investments

Since the pandemic, triple net lease investments and sale-leasebacks have become especially attractive because they are dependable, income-producing investments in any economy. Leasebacks are also a reliable choice for investors who want to fulfill the 1031 exchange requirements.

Whether you’re a savvy investor or just entering the triple net lease market, by no means is it too late to get a great deal on one of these prime properties. Contact our team today for a no-obligation conversation about your sale-leaseback investment options. 314-997-5227


 

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