Sale-Leaseback vs Selling and Moving

An owner who wants to turn a building into cash has two basic routes. In a sale-leaseback, you sell to an investor and sign a lease the same day, and operations continue where they are. In a sale with relocation, you sell the building to be delivered vacant, or with only a brief period of occupancy after closing, and move the business to space that you lease or buy elsewhere.

The proceeds may look similar. The consequences are not. One keeps your location and binds you to it by lease. The other frees you from the building entirely and requires you to find, fit out and move into a new one.

For some businesses the location is part of the operation, and moving would cost more than any difference in sale price. Signs that staying has real value include:

• Heavy or specialized installations, such as production lines, cranes, clean rooms, laboratories or clinical build-outs, that are expensive to move or rebuild.
• A workforce that lives nearby and would not follow the company to a new area.
• Customers or patients who come to the site and know where it is.
• Permits, licenses, zoning approvals or certifications tied to the address.
• Proximity to suppliers, transportation or a sister facility.
• A building that fits the business well today and has room for expected growth.

If several of these apply, a leaseback preserves something a relocation would destroy. The price of that continuity is a long lease on a building you used to own.

The opposite case is common too. Companies change, and the building bought twenty years ago may now be too large, too small, poorly laid out or in the wrong place for hiring. A long leaseback would lock the company into the very problem it should be solving.

One organization TAG represented had owned a large building for years and concluded that a different kind of space would serve it better. It sold and moved; it did not lease back.

If you would not choose this building today, do not sign a long lease on it simply because you already occupy it.

This is the part owners most often overlook. A leased sale and a vacant sale are offered to different audiences who value the property in different ways.

• Net lease investors buy a sale-leaseback. They are purchasing a rent stream. Price depends on the rent, the length and terms of the lease, and your company's financial strength, with the real estate as a backstop.
• Owner-users buy vacant buildings to occupy themselves. They pay for a building that suits their own operations and may value features an investor would discount. They often need time to arrange financing.
• Developers and redevelopers buy for the land or for conversion to another use. They pay for location, zoning and potential, and may regard your building as a cost to remove.
• Investors who buy vacant buildings to lease them up take on the risk of finding a tenant and price that risk into their offer.

Neither audience reliably pays more. A specialized plant occupied by a strong company on a long lease may be worth more leased than vacant. A well-located building on land in demand for another use may be worth more empty. A building with a short leaseback or a weak tenant can fall between the two and satisfy neither group. The only way to know is to evaluate both.

Relocation has costs that do not appear on the closing statement for the old building.

• Finding and securing new space, and the lease or purchase terms that come with it.
• Design, construction and fit-out of the new premises, less any allowance a new landlord provides.
• Moving equipment and inventory, and production or revenue lost during the move.
• Possible overlap, paying for two locations while one is built out or the other is sold.
• Staff turnover if the new location lengthens commutes.
• Timing risk: the sale and the new space must line up, or you need a short-term leaseback or interim space to bridge the gap.

A leaseback avoids those costs and substitutes others: rent on a long commitment, usually with scheduled increases; continued responsibility for much of the building's upkeep under a net lease; and limits on alterations, subletting and exit. If the building has deferred maintenance or obsolete features, a leaseback keeps those problems in your operation.

Both paths are sales of the property. Under IRS Publication 544, gain is measured as the amount realized over adjusted basis, so ask your CPA to estimate the tax for each path before comparing them.

The choice is not strictly binary. Owners who plan to move but need time can sell and lease back for a short period while the new space is prepared. Owners who need less space can sell and lease back part of the building, leaving the buyer to lease or occupy the rest. Both variations change who the likely buyer is, because a short or partial leaseback appeals more to owner-users and redevelopers than to long-term net lease investors. We cover them in a separate guide.

1. Define what the business needs from its real estate for the next ten years: size, layout, location, power, parking, image.
2. Score the current building against that list honestly, as if you were a tenant touring it for the first time.
3. Estimate the full cost and disruption of relocating, including fit-out and downtime.
4. Have the property valued both ways: leased to your company on realistic terms, and vacant.
5. Survey the market for alternative space so that the comparison is to real options and real rents.
6. Compare net proceeds, annual occupancy cost and operating risk for each path over the same period.
7. Choose the path, then set the timeline so the sale and any move are coordinated.

• ✓Would we choose this building today if we were starting fresh?
• ✓What would it cost, in money and disruption, to move?
• ✓Is the building worth more with us in it or empty?
• ✓Are we confident enough in this site to sign a long lease?
• ✓If we move, can we close the sale and occupy the new space without a gap?

Because TAG represents occupiers in leasing, purchasing and sale-leasebacks, we can evaluate both paths for the same client: what the building would bring leased or vacant, and what replacement space would cost and require.