3 Questions to Ask Before a Sale-to-Leaseback Agreement

By Hannah Smith - 10 Jul '19 17:03PM

If your business is changing and evolving, you might be considering selling your building and leasing it back. This can take the burden of ownership off of your plate and give you an infusion of cash.

This type of leaseback is a somewhat unusual arrangement, but it does happen and it does have its advantages. However, it's important to know that this is not as simple as selling a building and then signing a lease like you're a brand new tenant off the street. There are far more intricacies than that.

To make sure that this is the right move for your business, here are a few questions to ask yourself.

1. Why Are You Doing This?

As we mentioned earlier, the concept of selling your commercial building and leasing it back may seem strange to some. However, there are some examples of very well-known companies that have done this.

The New York Times is one of the most famous examples of opting for a leaseback in 2009 and opting to buy it back again in 2018. More recently, we've seen EV start-up Faraday Future leaseback their own building to try to survive an early storm.

You're probably looking at a leaseback if you're struggling with debt, looking for the funds to expand, or looking for some off-balance-sheet financing.

2. How Will This Impact Your Tenants?

If you currently have tenants in your building, you need to ask how this will impact them. They're about to get a completely new landlord.

You likely have used your own procedures and templates for running the day-to-day and month-to-month business of dealing with these tenants. Will these still be in place when the property changes hands?

Also, you may have made promises or arrangements for the future with tenants, either officially or unofficially. These need to be documented in an estoppel certificate for each respective client.

3. Are You Prepared For the Culture Shift?

Will there be any anticipated friction between the old guard and the new guard? After all, there was the old way of doing things (your way) and there will now be a new way of doing things (their way).

You obviously need a great relationship and clear communication with the company who is about to be your new landlord. Even the most micro details need to be discussed well in advance. For example, how will utility and other costs be handled? It may seem trivial, but you need to be mindful of the fact that any "surprises" can lead to a soured relationship between you and the building's new owner.

The leaseback can work out well and be a real win-win for both parties. Your business sees a great influx of cash, while the buyer gets a property with an experienced tenant who knows how to care for it. However, like anything in commercial real estate, it needs to be entered into with clear eyes, and due diligence done by both parties well in advance.

You don't want to end up becoming a miserable tenant in a building you used to own.

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