Companies that own their own industrial real estate are seizing a lucrative opportunity: Sell your real estate under a sale-leaseback agreement and get an influx of cash to grow the business while remaining at that same property.
Although the number of industrial sale-leasebacks — a transaction type in which a property is sold and leased back by the seller — so far this year in L.A. County is lower than last year’s number, the dollar volume is way up.
There have been 20 industrial sale-leasebacks in L.A. County in 2021 worth nearly $640 million, compared with 31 last year for nearly $473 million, according to data from CoStar Group Inc.
Experts agree that the number of sale-leasebacks is now increasing, largely driven by the high prices industrial properties are fetching in the current market.
“We are seeing a ton of these transactions, especially short-term sale-leasebacks where people can use the time to get out of the building and use the time wisely to take advantage of the hot market,” said Barbara Perrier, a vice chairman at CBRE Group Inc. “We’ve seen a lot of that activity recently. More than ever in my career.”
Jeff Sanita, a senior managing director at Newmark Group Inc., said he also sees a lot of sale-leasebacks, especially since “the industrial market continues to be absolutely on fire.”
“We’re basically out of product,” Sanita said. “That’s really pushed rental rates and deal terms up and created a frenzied atmosphere. On the buyer side, there’s so much money that wants to get into industrial because it’s been a safe harbor and is doing so, so well, even during Covid.”
Perrier said one reason companies are selling now is because they are being offered “record prices.” She said some companies are getting unsolicited offers for more than they realized the real estate was worth and “see it as a good time to sell.”
Sanita agreed, adding that some buyers are viewing a sale-leaseback “as a vehicle” to encourage some companies to sell.
A good time to sell
This fall, International Tea Importers sold its properties at 2140 Davie Ave. and 5830 Triangle Drive to Longpoint Realty Partners in a sale-leaseback for $17.5 million.
Alexander Harrold, a vice president and senior director at Matthews Real Estate Investment Services, was one of the agents representing the seller, who he said saw the advantages of selling.
“We’re not only seeing (the sale-leasebacks trend) in SoCal but nationwide,” he said. “The reason being, on the industrial side, investments have increased dramatically, probably 20% this year alone. Sellers are realizing, hey, the value is 20% more than it was earlier this year, people are willing to pay all cash and be good landlords, and they are looking to put that $17 million back into the business.”
Many companies, Harrold added, “are better off putting that money to work” than having it sit in real estate, and they can use the money to expand and on things that bring in a higher return than what they would save on rent.
“It’s a self-financing tool,” Harrold said. “It’s a way to get bigger and better and compete with competitors and grow.”
Matthew Mousavi, managing principal at SRS Real Estate Partners, agreed, calling it “an alternative financing structure.”
“A lot of these owners and operators, the companies themselves, realize that we are in a market or a window within the market where cap rates are at all-time lows, there is an abundance of capital for this product type, and it is an opportunistic play to access that capital; it is a more efficient use of that capital,” he said. “A lot of these companies can increase their returns and have more capital for their business and growing their business versus keeping the real estate assets and all the equity tied up in the real estate assets. It’s a way to free up that liquidity and put it to use and get more of a return by investing it in their core business.”
A good time to buy
Ted Evans, director of asset management at Santa Monica-based industrial real estate development company and owner Dedeaux Properties, said the company has done a few sale-leasebacks, including short-term ones, in the past few months and is interested in doing more.
“We’re thrilled to do it because it allows our team time to go through the entitlements and municipal process, which sometimes can take 12, 18-plus months,” Evans said. “It allows us to get a little bit of revenue while also benefiting who’s now our tenant by allowing them time to figure out their next steps.”
He added that in most cases, the lease agreements were true triple net leases where the tenant paid for everything from operating expenses to taxes.
Mark West, a senior managing director at Jones Lang LaSalle Inc., added that, especially in the case of longer leases, sale-leasebacks were a stable option for investors.
“It’s a long-term, passive investment that you can get a very good return on your investment, and it’s long-term, stable cash flow that is usually growing every year or every five years,” West said. “It’s more like a bond than a real estate transaction.”
“From a buyer perspective, the benefit is that they have an income stream, which can be long-term or short-term,” she said.
Steve Lurie, a real estate partner in the firm Greenberg Glusker Fields Claman & Machtinger, added that lease rates were generally market rents and, therefore, desirable to buyers.
For the International Tea Importers sale and many like it, Harrold said, there is one other issue at play: Many funds are receiving endowments or investments specifically for industrial real estate.
These buyers are looking for industrial real estate opportunities, which are in short supply, and sale-leasebacks can create new opportunities.
More to come
While experts agree that sale-leaseback agreements are lucrative to both buyers and sellers, that doesn’t mean they are without some drawbacks.
“The biggest negative to buying long-term, 15- to 20-year leases is … if it’s in a market where the rents are really growing very, very fast, you are going to set the rent for the next 15 or 20 years, so if the market is really, really high and rental rates are moving up and in three years the rent goes up 25%, you can’t move the rental rate until the lease matures,” West said.
Lurie added that there are also some tax disadvantages.
The seller, he said, would have to pay capital gains taxes and will be paying rent instead of making an often tax-deductible interest payment. Still, Sanita said, some lease payments can be written off as a business expense.
The seller, Lurie said, also loses some flexibility by leasing and not owning the property. That lack of flexibility, according to Harrold, can be an issue, too, if a company sign a long-term lease and the business starts doing poorly.
There will be more sale-leasebacks in the industrial market moving forward, however, experts say.
Mousavi said the lack of new industrial product coming to L.A. means the market will continue to be tight.
In the third quarter, there were nearly 4 million square feet of industrial product under development in L.A. County, according to JLL — a small number when you consider that the market totals 778 million square feet.
“That will continue to keep prices very strong as we go into 2022 and 2023,” Mousavi said.
Sanita agreed, adding that he didn’t see the industrial market slowing down, and sale-leasebacks were a way of getting new sellers.
Matthews’ Harrold added that as “owner/operators start to see the values continue to go up, it’s going to be a lot more enticing to them to sell.”
“People are going to get more interested because they are going to get approached by other brokers and owners who are desperate to own something like this,” he said.
Right now, there is a lot of capital in the market, according to JLL’s West, meaning a lot of money available for acquisitions. And another factor contributing to the increase in sale-leasebacks is the rate at which companies are growing.
“If you have the corporate users that are continuing to grow, and the economy is continuing to grow, which we are experiencing now, then I would expect for it to increase as well,” West said. “All things are pointing in the right direction for more sale-leaseback activity.”
Top 5 Sale-leasebacks of 2021
2850 E. Del Amo Blvd., Carson
Buyer: CenterPoint Properties
Seller: Universal Logistics
Square feet: 264,450
Sale price: $126 million
17411 Valley Blvd.,
City of Industry
Buyer: Scout Capital Partners
Seller: Sweda Co.
Square feet: 350,256
Sale price: $117 million
15005 Northam St.,
Buyer: LBA Realty
Seller: International Paper Co.
Square feet: 236,069
Sale price: $95.5 million
5102 Industry Ave.,
Buyer: Black Creek Group
Seller: Howard’s TV & Appliance
Square feet: 172,344
Sale price: $63.1 million
8500 Mercury Lane,
Buyer: CenterPoint Properties
Seller: GRM Document Management
Square feet: 173,134
Sale price: $63 million
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