Short-Term and Partial Sale-Leasebacks

In a conventional sale-leaseback, an investor buys your building because you are committing to pay rent for a long time. The lease is the product. In the two variations covered here, the lease is a bridge or a fraction of the deal, and the buyer is mostly interested in the property itself.

• Short-term leaseback: you have decided to leave. You sell now, perhaps because a buyer has appeared or the market timing suits you, and you rent the building back for the months you need to relocate.
• Partial leaseback: you have more building than you need. You sell all of it and lease back the portion you still use, and the buyer leases or occupies the rest.

The two can also combine, for example leasing back half the building for a limited period during a phased move.

The practical problem a short-term leaseback solves is sequencing. Without one, you either move first and carry two facilities until the old one sells, or you sell first and have nowhere to operate. With one, the sale closes, the proceeds are in hand to fund the new location, and operations continue until the new space is ready.

Because the stay is temporary, the negotiation centers on certainty and flexibility for you, and on a firm exit for the buyer.

• ✓Is the leaseback period long enough to cover a realistic schedule for your new space, including permits, construction and equipment moves, with a margin for delay?
• ✓Do you have one or more extension rights, exercisable on notice, at a rent agreed now?
• ✓Can you leave early without paying rent through the end of the period?
• ✓What is the holdover rent if you run late, and does the buyer have damages claims beyond it?
• ✓Is the lease gross or net, and who handles repairs for a building you will soon vacate? Avoid taking on capital replacements during a short stay.
• ✓In what condition must you return the building, and what equipment, signage and specialized improvements must be removed?
• ✓Is any part of the purchase price held back until you vacate, and on what conditions is it released?

Buyers in these deals have their own clock. An owner-user wants to move in. A developer wants to start work. Understand what the buyer plans to do the day after you leave, because that tells you how much flexibility on timing is realistic and what a delay would cost them.

A partial leaseback turns a single-occupant building into a multi-tenant one, with you as the first tenant. That conversion raises questions that never came up while you owned the whole property.

• Demising: who builds and pays for the wall, the separate entrances, and any split of loading docks, restrooms and parking?
• Utilities and systems: are power, gas, water and HVAC separately metered or will costs be allocated, and on what formula?
• Shared costs: what share of taxes, insurance and common area maintenance do you pay, and is your share fixed or does it move with the space actually leased?
• Vacancy: while the rest of the building is empty, who carries its share of operating costs? It should not be you.
• Neighbors: do you have any say over who occupies the other space, for example a competitor or a use that conflicts with yours?
• Growth and exit: do you have a right to take back space if you grow, or to give more back if you shrink?

The buyer is taking leasing risk on the space you are not using, and will price the building with that in mind. A property where you lease back most of the space on a long term looks close to a conventional sale-leaseback. A property where you keep a small corner looks like a vacant building with a little income, and the offers will reflect it.

Net lease investors, the usual buyers in a long-term sale-leaseback, are buying a durable income stream. A stay of a few months, or a tenant in a fraction of the building, generally does not fit what they are looking for. The likely buyers for these variations are different.

• Owner-users who want the building for their own operations and can wait for you to leave, or can share it.
• Developers and redevelopers who value the site and see your short stay as income during their planning period.
• Value-add investors who are comfortable leasing vacant space and see your partial leaseback as a head start.

These buyers generally price the property on what the real estate is worth to them, with your rent as a secondary factor. That changes how the building should be marketed. A vacant-building or user-sale process reaches a different audience than a net lease offering, and choosing the wrong one leaves buyers out.

It also changes the trade between rent and price. In a long leaseback, a higher rent supports a higher price. In a short leaseback, rent for a few months barely moves the price, so there is little reason to agree to anything above a fair market rate.

The accounting for a leaseback follows the lease accounting rules, and a short lease can be treated differently from a long one. Under US GAAP, lessees have a short-term lease exemption for leases of 12 months or less, and a seller-lessee may be able to apply it to a leaseback. Ask your CPA whether your leaseback, including any extension rights, would qualify, and do it before the terms are final.

On the tax side, a sale is a sale whether you stay three months or many years, and the gain is computed the same way. The length and structure of the leaseback can matter to other tax questions, so have your CPA review the documents before they are final.

Our role in either variation is the same as in any sale-leaseback: we represent the occupier, find the buyers suited to the building, and negotiate the sale terms and the leaseback together so that the move, or the smaller footprint, actually works operationally.

1. Fix your operating plan first: where you are going and when, or how much space you will keep and for how long.
2. Build a relocation or demising schedule with your contractor and add a realistic delay allowance.
3. Decide which buyer types fit the property and market it to them.
4. Put the key leaseback terms in the letter of intent, not only the price: period, rent, extensions, early exit, holdover and surrender condition.
5. Negotiate the purchase agreement and the lease in parallel so neither is used as leverage against the other.
6. Line up lender payoff, environmental and title work early so the closing date is not what delays your move.