Life After a Sale-Leaseback: Being a Tenant in Your Own Building

On the morning after closing, employees park in the same lot and the same machines run. The differences are administrative, and they need an owner inside the company from day one.

1. Name a lease administrator, often the controller or facilities manager, who holds the signed lease and is responsible for every obligation in it.
2. Set up rent payments and confirm the landlord's payment instructions and notice address in writing.
3. Change the property insurance to match the lease: required coverages, limits, and the landlord and its lender named as the lease specifies.
4. Build a calendar of critical dates: rent increases, renewal option notice deadlines, reporting deadlines and the expiration date.
5. Write a one-page summary of what the company may do without consent and what requires it, and give it to operations and facilities.
6. Complete any post-closing items from the purchase agreement, such as agreed repairs or environmental follow-up.
7. Have your CPA record the transaction and set up the lease accounting.

On that last point, under US GAAP a seller-lessee applies lessee accounting to the leaseback, which involves recognizing a right-of-use asset and a lease liability. Your finance team will maintain those balances for the life of the lease, so the lease administrator and the controller should work from the same schedule of payments.

Most leasebacks are net leases, so the company keeps doing much of what it did as owner. The difference is that those tasks are now contractual duties owed to someone else, with standards and deadlines.

• Maintenance. You likely still maintain and repair the building. The lease now defines the standard, and the landlord can inspect and insist that it is met.
• Taxes and insurance. You likely still pay them, directly or through the landlord. Keep proof of payment, since the lease may require you to provide it.
• Use of the building. You may use it for the purposes the lease permits. A new line of business or a different use may need consent.
• Capital projects. As owner you decided when to replace a roof or repave. Now the lease says who decides, who pays and what approval is needed.
• Appreciation. Increases in the property's value belong to the landlord. Your interest is the right to occupy on the agreed terms.

The practical adjustment is cultural as much as legal. People who have treated the building as the company's own for decades need to know that drilling through the roof for new equipment is now a question to ask first.

A well-negotiated lease lists what you can do freely and sets a fair process for everything else. Whatever your lease says, a few habits make approvals routine.

• Read the lease before planning a project, and follow its notice procedure exactly, including the delivery method and address.
• Send complete requests: drawings, contractor information, insurance certificates and a schedule. Incomplete requests are the usual cause of delay.
• Ask early. Approval periods run from the date of a proper request, and a production deadline is not the landlord's problem.
• Keep every consent in writing and file it with the lease.
• Record whether an approved alteration must be removed at the end of the term, and get that answer when consent is given.

Transfers deserve the same care. Subletting part of the building, assigning the lease, merging, or selling a controlling interest in the company may each require consent or notice. If a sale of the business is under discussion, review the assignment and change-of-control provisions with your attorney before signing a letter of intent with a buyer.

Missing a renewal notice deadline can forfeit an option you negotiated hard to get. Put the date on more than one person's calendar, with a reminder well ahead of it.

Your landlord is an investor that underwrote your company's credit, and it will want to keep watching it. Leasebacks commonly require periodic financial statements. Some include financial covenants or additional credit support if the company's condition changes.

You will also be asked from time to time for an estoppel certificate, a signed statement confirming the lease terms, the rent paid to date and whether either party is in default. Landlords request these when they sell or refinance, and buyers and lenders rely on them. Review each one carefully against your records, and correct anything inaccurate before signing, because you may be held to what it says.

• ✓What financial statements are due, in what form and by what date?
• ✓Is the information we provide covered by a confidentiality obligation?
• ✓How many days do we have to return an estoppel certificate?
• ✓What notice must the landlord give before entering or inspecting?
• ✓Who in our company signs certificates, and who checks them first?
• ✓Are there insurance certificates or maintenance records we must deliver every year?

Investors sell properties, and some buy with the intention of reselling. You may learn one day that the building has a new owner. In general a lease stays in place when the property changes hands, and the new owner takes the property subject to it. Your rent, term and options continue as written. Confirm the specifics of your own lease with your attorney.

What can change is the relationship. A new landlord may manage more or less actively, interpret consent provisions differently, or use a different property manager. This is the reason to have rights written into the lease and not left to goodwill with the original buyer.

• When notified of a sale, get written confirmation of where to send rent and notices before changing payment instructions.
• Confirm that the new owner holds or has credited your security deposit, if any.
• If the landlord takes a new loan, you may be asked to sign a subordination agreement. Ask for a non-disturbance agreement from the lender in return, and have your attorney review it.
• Update your insurance certificates with the new owner and lender.

The end of the term arrives faster than expected. Well before the option notice date, decide whether the building still fits the business, what a renewal would cost under the lease, and what comparable space would cost elsewhere. Starting early leaves time to negotiate, or to relocate without pressure.

Even with a fixed-rent option, a tenant with real alternatives can sometimes negotiate improvements in exchange for a longer commitment. TAG represents tenants in renewals and renegotiations, and the same work applies to a company that sold its building: reading what the lease allows, weighing a renewal against the alternatives, and negotiating with the landlord.