Do You Need a Broker for a Sale-Leaseback?

Selling a building you occupy is two negotiations joined together. You are a seller agreeing on a price, and you are a future tenant agreeing on a lease with the same counterparty at the same time. The investor on the other side does this for a living and usually arrives with its own form of lease, its own underwriting model and its own advisors.

Most business owners and CFOs handle a transaction like this once, or once in a generation. That gap in repetition is the main reason companies hire an advisor. It is not that the steps are secret. It is that the other side has taken them many times and knows where the value moves.

Whoever runs the transaction, someone must do each of the following well:

• Estimate what the building would rent for on the open market, because rent drives the price.
• Identify which categories of investor buy this property type, size and tenant profile.
• Present the company's financial story in a way that supports the price.
• Create enough competition that the price and lease terms are tested.
• Negotiate the letter of intent, where most of the economics are fixed.
• Coordinate the lease, the purchase agreement, due diligence and closing with attorneys and consultants.

An advisor's contribution falls into four areas. When you interview one, ask for specifics in each.

• Pricing on both sides of the deal. A sale price can only be judged next to the rent that supports it. An advisor who negotiates leases regularly can tell you whether the proposed rent is at, above or below what the building would lease for, and what that means for you in later years.
• Reach. Net lease investors differ in what they buy and how they behave as landlords. An advisor knows which groups are active for your kind of property and can bring several to the table at once.
• Negotiating position. Offers collected on a common schedule give you alternatives. An advisor also keeps the selected buyer honest during due diligence, when requests for price reductions tend to appear.
• Process management. A sale-leaseback has many moving parts: confidentiality agreements, a data room, site visits, environmental and title work, lender payoff and two major contracts. Someone has to keep the sequence moving while you run the business.

An advisor does not replace your real estate attorney or your CPA. Legal drafting, tax consequences and accounting treatment belong to them. The broker's role is the market, the strategy and the negotiation of business terms.

Some sale-leasebacks are completed without a broker on the seller's side and turn out fine. The conditions that make that more likely are fairly specific.

• ✓Do we already know and trust the buyer, such as a related party, an existing investor or a long-time business contact?
• ✓Have we had the building's market rent and value checked by someone independent of the buyer?
• ✓Does our attorney regularly negotiate net leases and purchase agreements for commercial property?
• ✓Does someone on our team have the time to manage due diligence for several months?
• ✓Are we comfortable that we could not have obtained better lease terms from another investor?
• ✓Is the lease short, or the property small enough, that the long-run cost of an imperfect deal is limited?

If most answers are yes, a direct transaction supported by good counsel and an independent valuation can be reasonable. If the buyer is an institutional investor you have never dealt with, the answers usually change.

The risks of an unrepresented sale-leaseback are quiet ones. Nothing obviously goes wrong at closing. The costs appear later.

• Rent set above market. A buyer may offer an appealing price that is supported by rent higher than the building would command. You collect the premium once and pay for it every year.
• The buyer's lease form. Investor leases are drafted to protect the investor. Without pushback, you may accept broad repair duties, tight limits on alterations and assignment, and renewal terms that favor the landlord.
• No comparison. With a single offer you cannot tell whether a different investor would have paid more or asked for less.
• Retrading. A sole buyer who knows there is no backup has more room to ask for concessions after inspections.
• Your time. The owner or CFO becomes the project manager during a period when the business still needs attention.

If an investor's broker offers to handle everything for both sides, ask in writing whom that broker represents. A broker engaged by the buyer owes its duties to the buyer.

Compensation arrangements vary and are set out in the engagement agreement. Ask any advisor to state in writing who pays the fee, how it is calculated, when it is earned, and whether the advisor or its firm could receive anything from the buyer. Clear answers here tell you a good deal about how the rest of the relationship will go.

1. Write down what you want from the transaction: the amount of cash needed, how long you intend to stay, and what flexibility the business will need.
2. Get an independent view of market rent and likely value before speaking with any buyer in detail.
3. Decide whether the transaction is simple and familiar enough to run with counsel alone.
4. If not, interview advisors and ask which side of lease negotiations they normally represent.
5. Confirm the scope, fee and term of the engagement in writing before the property is shown to anyone.

TAG works on the occupier's side. We represent tenants and buyers of commercial space, so in a sale-leaseback we represent the company that is selling and staying, and we negotiate the price and the lease together with your attorney and CPA at the table.