A record amount of commercial real estate loans (more than $900 billion) are maturing in 2023, putting pressure on banks to limit their risk, thus tightening their refinancing guidelines. Typically, a commercial loan has a balloon payment at the end of the term, meaning the borrower must pay the remaining amount in full or refinance, finding another lender to pay off what they owe. These refinance loans are becoming more difficult to acquire, forcing property owners to explore other avenues to restructure their debt.
Enter the sale-leaseback deal: a company sells its real estate to an investor and then enters a long-term lease for the property, allowing them to access capital and pay down their debt. In our current economic climate, an increasing number of corporate owners are pursuing sale-leaseback deals to jumpstart their debt restructuring instead of waiting for cap rates to compress.
With real estate valuations at all-time highs, the sale-leaseback transaction is especially advantageous for sellers because it allows them to yield more cash than traditional financing, which often gives 80% or less fair market value. Sale-leasebacks also offer more security and predictability for a company – just look at the predicament we’re in now. With traditional financing, companies are required to refinance after three, five or ten years, exposing them to the risk of a financial downturn or climbing interest rates. When a company enters into a sale-leaseback deal, they sign a long-term lease (usually 20 to 30 years) with an attractive rate.
This type of arrangement is also very beneficial to buyers and is creating opportunities to acquire net leases that weren’t previously available. An investor can purchase an asset with a guaranteed lease and can structure the deal as triple net (NNN), meaning it has minimal landlord responsibilities.
By working with an experienced commercial real estate advisor, investors can access net lease opportunities with credit-worthy tenants that provide stable profit for years to come.
Justin Langlois, CCIM is a Commercial Real Estate Advisor with Stirling Investment Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.