What Is A Sales-Leaseback Syndication? (6 min)
Typical real estate syndications are a type of investment strategy in which a group of investors pool their resources to purchase, manage, and operate income-producing real estate properties.
The general partner (GP) is responsible for acquiring, managing, and operating the properties, while the limited partners (LP) provide the capital to fund the purchase and ongoing operations. The limited partners receive a share of the profits generated by the properties and benefit from the appreciation of the real estate assets.
This investment strategy allows investors to participate in real estate ownership and operations without having to manage the property themselves. It also provides access to larger and more diversified real estate investments that would otherwise be beyond the reach of individual investors. The most common types of syndications I’ve invested in & Co-GP’d with are Multifamily, Self-Storage & Mobile Home Parks.
Here’s the play:
Sponsor (GP) buys the asset leveraging loans from banks + private equity from folks like you & me (LP)
Makes property & process improvements.
Sells the property at a profit typically over a 3~5 year period.
Goodness for everyone:
Seller is able to step away from the property without having to update & remodel.
Buyer (Sponsor) creates value & profit by optimizing & upgrading the property & its operations.
Investors enjoy cash flow with beneficial tax treatment.
Tenants have a better place to call home.
Last year I discovered an interesting variant to this model:
Sale-Leaseback Syndications
Sale-leaseback (SLB) syndications are a type of financing structure in which an owner of real estate property sells the property to the sponsor and then leases it back for continued use.
The owner receives a lump sum of cash from the sale of the property, which can be used for a variety of purposes, such as paying off debt, financing growth, or returning capital to investors.
In a sale-leaseback syndication, the sponsor buys the property and leases it back to the original owner. The lease is typically structured as a fixed rental rate with annual increases and a predetermined long lease term (typically 10+ years).
SLB’s are often used by companies that own real estate that is critical to their operations, but that they no longer need to own. By selling the property and leasing it back, the company can free up capital while still retaining access to the property and the use of its facilities. The buyer (sponsor) generates income from the lease payments and profit when the property is sold.
Business Model for Sale-Lease Back
The most common business model for SLB syndications is a triple-net (NNN) lease structure, where the tenant is responsible for paying all of the operating expenses associated with the property:
Property taxes
Insurance
Maintenance/repairs.
In this model, the tenant typically agrees to a long-term lease agreement, ranging from 10 to 25+ years, and the rental rate is based on market conditions and the operating expenses associated with the property.
In a triple-net lease structure, the sponsor acts as the landlord and is responsible for the acquisition and financing of the property, but the tenant is responsible for all of the operating expenses.
This model allows the sponsor to receive a stable return on investment through the rental income, while the tenant is able to free up capital and maintain control of its operations.
Typical NNN leases have built in annual rent increases to reflect increasing future market lease rates.
Benefits
Sale-leaseback syndications can offer a number of benefits to both the tenant and the investors.
For the Tenant:
• Capital generation: The tenant can receive a lump sum of cash from the sale of the property, which can be used for a variety of purposes, such as paying off debt, financing growth, or cost intensive capital improvements.
• Improved balance sheet: By selling the property, the tenant can reduce its debt-to-equity ratio, improve its financial flexibility, and increase its borrowing capacity.
• Continuity of operations: The tenant can continue to use the property under a long-term lease agreement, ensuring that its operations are not disrupted.
For The Sponsor/Investor:
• Income generation - The investors can receive a steady stream of rental income from the lease payments, providing a stable return on their investment.
• Diversification of investment portfolio - The investors can diversify their investment portfolio by including real estate investments, which can provide a hedge against inflation and market volatility.
• Real estate exposure - SLB’s can provide investors with exposure to the real estate market, which can offer long-term capital appreciation potential.
Risks
Sale-leaseback syndications, like any financial transaction, can have some potential problems and risks that must be considered. Some of the most common challenges and risks associated with sale-leaseback syndications include:
• Tenant credit risk: The success of a sale-leaseback syndication depends on the ability of the tenant to pay rent and fulfill the terms of the lease agreement. If the tenant experiences financial difficulties, the investor may not receive the expected rental income.
• Interest rate risk: If interest rates rise, the value of the property may decrease, which can negatively impact the value of the investment.
• Lease termination risk: The tenant may choose to terminate the lease early, which can result in the loss of rental income and the need to find a new tenant.
• Market conditions risk: Changes in the real estate market, such as declining property values or increased competition, can negatively impact the value of the investment.
How to Mitigate the Risks
The main factors in a SLB is the long term financial health of the tenant & fundamental value of the property on the open market. There are 3 main areas to consider:
Tenant overall credit. At acquisition & quarterly thereafter, sponsor should conduct assessments of tenant’s long term financial profile, access to capital & avoid highly vulnerable companies
Examine business unit level financial statements for all locations of the tenant’s business to keep a bird’s eye view of the company as a whole.
Ensure the property itself has broad appeal to a variety of other tenants in the case the building needs to be leased to another company at prevailing market rates.
A Little History . . .
The history of SLB syndications can be traced back to the early 20th century, when companies began using this financing structure as a way to raise capital. In the early days of sale-leaseback syndications, the focus was primarily on industrial properties, such as factories and warehouses, as these were seen as stable and reliable sources of rental income.
Over time, the use of sale-leaseback syndications has expanded to include a wider range of property types, including retail, office, and multi-family properties. The growth of the sale-leaseback market can be attributed to several factors, including changes in the tax code, an increase in real estate market liquidity, and the growing popularity of real estate investment trusts (REITs).
In recent years, sale-leaseback syndications have become a popular financing option for companies seeking to raise capital and improve their balance sheets. The global financial crisis of 2008 and the subsequent economic downturn led to a decline in the real estate market, but the sale-leaseback market has since recovered and continues to grow. Today, sale-leaseback syndications are used by companies of all sizes, across a range of industries, as a way to raise capital, reduce debt, and improve their financial position.
Who Typically Invests In Sale-Leaseback Deals?
Sale-leaseback syndications can be an attractive investment opportunity for a variety of investors, including:
Institutional Investors - Institutional investors, such as pension funds, insurance companies, and endowments, are often attracted to sale-leaseback syndications because they offer a steady stream of rental income and long-term stability.
Real Estate Investment Trusts (REITs) - REITs are companies that own, operate, or finance income-generating real estate properties. Sale-leaseback syndications can be an attractive option for REITs because they provide access to a new pool of properties and help to diversify their investment portfolios.
High-Net-Worth Individuals - High-net-worth individuals, such as wealthy individuals, family offices, and private equity firms, may be attracted to sale-leaseback syndications as a way to invest in real estate and diversify their investment portfolios.
Retail Investors (aka - folks like you & me) - Sale-leaseback syndications can also be an option for retail investors, such as individual investors, who are looking for a stable, long-term investment with the potential for a steady return on investment.
Are SLB Return Profiles Similar to Multifamily Deals?
. . . They are close . . . very close.
Value Add multifamily offers are designed to buy an underperforming asset, upgrade it, then sell at a profit as soon as the economics allow. In my experience, average hold periods are 2~4 years, cash distributions monthly or quarterly. Including profits at exit, annualized returns range from the mid teens to low 20’s.
Sale-Leaseback deals are designed to buy a large property/facility & lease it back to the seller over a 10-25 year lease period. There is usually no material value add element. Profit is simply the spread between rent income and (debt + asset management costs). The superpower here is that the lease terms & scheduled annual rent increases are “baked in” providing predictable cashflow. Being a triple net lease, variable costs like taxes, insurance & building maintenance are covered by the tenant. Each month the loan is paid down & if property valuations rise (historically is the case), the profit at sale will too.
The design tradeoff for all this safety & simplicity is a slightly lower overall return, but the predictable + higher day one cash on cash distributions can be very attractive.
What Types of Companies Choose Sale-Leasebacks?
A wide range of companies can engage in sale-leaseback syndications, including:
Manufacturing - often own large industrial properties, such as warehouses and distribution centers, that can be sold and leased back to generate capital.
Retail - such as big-box retailers and shopping centers, often own real estate assets.
Healthcare - hospitals and medical centers, often own real estate assets, including medical facilities.
Technology - often own real estate assets, including office buildings and data centers.
Government - such as cities, states, and federal agencies, often own real estate assets, such as government buildings and infrastructure.
Financial - banks and insurance companies, often own real estate assets.
Final Thoughts
There is no right or wrong with a sale-leaseback. It is a financing structure that may be a great option for one company, but less than ideal for another. Businesses looking to grow and expand, who own the real estate from which they operate, will benefit from a sale-leaseback and the associated capital injection.
As a passive investor, the day 1 higher CoC returns & reliable long term cashflow is an attractive option. For those investors who prioritize super predictable cash distributions, SLB syndications might just be worth a look.
If you are interested to learn more about syndications or be added to our “Deal Alert” list, email mitch@back9investments.com , or hit the big blue button to self schedule a call with Mitch.
*Real estate investing comes with a variety of risks including rising interest rates, lower than expected occupancy and the operator’s failure to execute the renovation and rental increase business plan. Real estate investments are also illiquid which means there is no readily available market for an investor to sell their interest in a real estate syndication. Investors are also typically required to be deemed an accredited investor. As with any investment, there is the risk the entire investment may be lost.