How to Choose the Right Sale-Leaseback Buyer

In an ordinary sale, the seller has no reason to care who the buyer is once the money arrives. In a sale-leaseback, the buyer becomes your landlord on the same day. It will approve or refuse your alterations, respond or fail to respond when you need a consent, decide whether to fund an expansion, and sit across the table at renewal. A somewhat higher price can be outweighed by a lease that costs more to live under, or by a buyer who reduces its offer late in the process.

The headline price can also be misleading in itself. Two offers at the same price may assume different rents, escalations, repair obligations and guaranties. Our guide on comparing offers explains how to put them on the same footing. This guide is about the buyer behind the offer.

An offer is worth only what closes. The risk is not just that a buyer walks away. It is that a buyer ties up the property under exclusivity, spends its diligence period finding reasons, and then proposes a lower price when your alternatives have gone cold. Some buyers have a reputation for this. Evaluate certainty directly.

• Source of funds: is the buyer paying cash from committed capital, or does it need a mortgage or to raise equity from partners for this deal? A financing condition adds a party, the lender, whose approval you do not control.
• Approval process: has the offer already been approved by whoever makes the final decision, or is it subject to a committee that has not yet seen it?
• Individual buyers: a private individual reinvesting the proceeds of another property sale can be motivated and decisive, but may be working against timing constraints of its own and may be less experienced with your property type. Ask what happens if that timing slips.
• Diligence terms: a shorter diligence period, a larger deposit and an earlier date on which the deposit becomes non-refundable all signal confidence.
• Track record: how many similar properties has the buyer closed, and will it let you speak with sellers from those deals about whether the price changed along the way?
• Familiarity: a buyer that already owns buildings like yours, in your region or industry, has fewer unknowns to resolve.

Ask each finalist for seller references, not only tenant references. The useful question is whether the price in the letter of intent was the price at closing.

Buyers differ widely in how flexible they are on lease terms, and the differences are not visible in the offer price. Some will work from a tenant-prepared term sheet and negotiate sensibly. Others insist on their standard form with few changes, often because their own lenders or investors require it.

Find out before you select. Send finalists your key lease terms and ask for written responses, or ask each to mark up a draft lease. The areas where buyers most often diverge are responsibility for roof and structure, alteration and expansion rights, assignment on a sale of your business, renewal rent mechanics, credit support, and surrender obligations. A buyer that accepts your terms at a slightly lower price may be the better economic choice once the lease is valued over its full term.

Think about the requests you are likely to make over the lease term and whether this buyer is set up to handle them.

• Hold period: does the buyer intend to own for the long term, or to resell the building once the lease is in place? Either can be acceptable, but if a resale is likely, the written lease matters even more, because you will not have chosen the next owner.
• Capacity to invest: if you may need an expansion or a major capital project, does the buyer have the capital and the willingness to fund it?
• Asset management: is there a staffed team that answers consent requests, or one individual with other priorities? Slow consents can delay financings, equipment installations and a sale of your company.
• Its lender: if the buyer finances the purchase, its lender will have approval rights over some landlord decisions. Ask who the lender is and whether it will sign a non-disturbance agreement in a reasonable form.
• Behavior in hard times: how has the buyer dealt with tenants who needed flexibility? Existing tenants can tell you.
• Fit with your property: a buyer that understands your industry is less likely to be alarmed by ordinary features of your operation.

No category of buyer is right for every seller. Institutional investors, private funds, family offices and individual buyers each have strengths and limits, described in our guide on who buys sale-leaseback properties. The point is to match the buyer's nature to what your business will need.

• ✓Where is the purchase money coming from, and is any of it not yet committed?
• ✓Who gives final approval, and has that person or committee approved this offer?
• ✓How many sale-leasebacks or net lease purchases have you closed recently, and may we call the sellers?
• ✓In how many of those did the price or terms change after the letter of intent, and why?
• ✓Do you plan to hold this building long term or resell it?
• ✓Will you finance the purchase, and will your lender provide a non-disturbance agreement?
• ✓Which of our proposed lease terms can you not accept?
• ✓Would you fund a future expansion, and on what basis?
• ✓Who will we deal with after closing, and how quickly do you respond to consent requests?
• ✓May we speak with two of your current tenants in similar buildings?
• ✓What financial reporting will you expect from us each year?

1. Narrow the field to the offers that meet your minimum price and your non-negotiable lease terms.
2. Normalize the remaining offers so price, rent, escalations and obligations can be compared directly.
3. Score each finalist on certainty of closing, using funds, approvals, diligence terms and references.
4. Ask finalists to respond in writing to your lease terms, and note the gaps.
5. Call seller and tenant references yourself or through your advisor.
6. Give the leading bidders a chance to improve price or terms.
7. Select the buyer, and keep the runner-up informed and interested until the deposit is non-refundable.

Keeping a credible second bidder is the most effective protection against a price reduction request. A buyer who knows there is an alternative has less reason to test you.

Evaluating buyers is where an advisor on the occupier's side earns its place. TAG has been representing tenants and buyers of commercial space since 2008, and in a sale-leaseback we represent the company that is selling and staying. We run the process so that several qualified investors compete on price and lease terms together, check each one's ability to close, and recommend the buyer whose offer holds up over the whole term of the lease. The decision is always the owner's.