Sale-Leasebacks for Manufacturers and Industrial Owners

Manufacturers tend to own their real estate. The building was bought or built decades ago, the mortgage is small or gone, and the plant has been fitted around the production process. The result is a large amount of equity in an asset the company has no intention of leaving.

At the same time, manufacturing is capital hungry. New equipment, automation, inventory, a second shift and acquisitions all compete for the same dollars. A sale-leaseback lets the company convert the building into cash while the plant keeps running in the same place. The company's use of the site continues; its ownership ends and a lease takes its place.

It is not the right tool for every plant. The points below are the ones that make industrial sale-leasebacks different from an office or retail transaction.

An investor asks a question the owner seldom does: if this tenant left, who else could use the building? A modern, rectangular building with good clear height, ample dock doors, truck access and a location near highways can be re-leased to many users. An investor will value that flexibility.

Many manufacturing plants are not like that. They have been expanded in stages, with low ceilings in the oldest sections, heavy power, pits, cranes, clean rooms, specialized ventilation or reinforced floors. These features may be essential to you and worth little to the next tenant. Some would cost money to remove.

This affects a sale-leaseback in two ways. The investor leans more heavily on your company's financial strength and on a longer lease commitment, because the building alone is weaker security. And the lease will say something about those improvements at the end of the term, which leads to the restoration question below.

In a plant, the line between building and equipment is not obvious. A bridge crane, a paint booth, a compressed air system, process piping, a dust collector or a furnace is bolted or wired into the structure. Unless the documents say otherwise, a dispute can arise later over whether an item was sold with the building.

• Attach a schedule to the purchase agreement and the lease listing machinery, process equipment and trade fixtures that remain the tenant's property.
• State that the tenant may remove, replace and finance that equipment during the term without landlord consent, subject to repairing any damage.
• Coordinate with any lender that has a lien on the equipment. Equipment lenders often ask the landlord to sign a waiver confirming the landlord claims no interest in it.
• Decide which building systems you installed, such as upgraded electrical service, are sold with the building and which are yours.

Tax ownership of improvements matters too. IRS Publication 946 explains that depreciation generally belongs to the owner of property and that a tenant can depreciate capital improvements it makes to leased property. Ask your CPA how the sale affects depreciation on what you sell and on what you keep.

Industrial sites carry environmental questions that offices do not: solvents and degreasers, plating, underground or aboveground tanks, floor drains, oils and historical fill. A buyer will investigate before it closes. The U.S. Environmental Protection Agency explains that purchasers of commercial property who may want protection from federal Superfund liability must conduct all appropriate inquiries before acquiring the property, and that the ASTM E1527-21 Phase I assessment standard can be used to meet that requirement.

For a seller, the practical lessons are consistent.

• Learn the site's condition before buyers do. Many industrial sellers commission their own assessment with their attorney's guidance so that findings can be addressed on their schedule.
• Expect sampling if the Phase I identifies a concern, and expect a negotiation over what the results mean.
• Understand that selling the building does not necessarily end your responsibility for contamination from your operations. The purchase agreement and lease will typically include environmental representations and indemnities from the seller-tenant. Your environmental counsel should negotiate their scope.
• Establish a documented baseline of site conditions at closing so that later questions about who caused what can be answered.

Environmental issues are a frequent cause of delay and price renegotiation in industrial deals, and they can also be resolved. One manufacturer TAG represented worked through remediation as part of its transaction.

Moving a plant means rigging and reinstalling equipment, requalifying processes with customers, renewing permits and risking the workforce. Because relocation is so costly, manufacturers are often willing to sign long leases, and investors value that.

The same fact is a risk. Once you are a tenant, the lease is the only thing protecting your right to stay. If the initial term and renewal options run out while your equipment still has decades of life, you will negotiate a renewal with very little leverage, since the landlord knows what moving would cost you.

Match the lease to the life of the operation. Negotiate renewal options that extend well past the initial term, a clear method for setting renewal rent, and the right to expand or alter the building as production changes. Also plan for the opposite outcome: if the business is sold, consolidated or outgrows the plant, assignment and subletting rights determine whether you can exit.

• ✓Does the lease permit our current operations, hours, materials and outdoor storage, and reasonable changes to them?
• ✓Can we install, move and remove equipment, add power and modify the building without consent for routine work?
• ✓Who pays to replace the roof, floor slab, paving and building systems, especially near the end of the term?
• ✓What must we remove at the end of the lease, and what may we leave in place?
• ✓How are environmental responsibilities divided between conditions before closing and conditions after?
• ✓Do we have enough renewal options, and how is renewal rent set?
• ✓Can we assign the lease to a buyer of our company without the landlord's discretionary consent?
• ✓Does the landlord have to recognize our equipment lender's rights?

TAG represents the manufacturer as seller and future tenant. We evaluate how an investor will see the building, bring qualified investors to the table and negotiate the lease with the plant's operating needs in front of us, working alongside the company's attorney, CPA and environmental consultant.