Who Buys Sale-Leaseback Properties?

When you sell an empty building, the buyer is paying for land, walls and location. When you sell a building and lease it back, the buyer is paying for a lease with your company's name on it. The property is security for that income. This is called net lease investing, because the tenant pays the building's operating costs and the owner receives rent that is close to passive.

That explains why the buyers below are not the same people who would bid for your building if it were vacant. A neighboring manufacturer or a developer might want the real estate. A net lease investor wants a dependable tenant on a long lease, and you are that tenant.

A real estate investment trust, or REIT, is a company that owns income-producing real estate on behalf of its shareholders. Some REITs specialize in net leased buildings and are regular, repeat buyers. They include companies whose shares trade on a stock exchange as well as non-traded REITs.

What they tend to care about: fit with standardized underwriting, the tenant's financial strength, lease length and the quality of the real estate. Industry commentary notes that their credit appetite varies. Some favor tenants with investment-grade ratings, and others hold a large share of unrated tenants. They can move relatively quickly on a property that fits their criteria, and they can buy several buildings from one seller in a single transaction.

As landlords they are institutional. Expect professional asset management, a firm view of what the lease says and formal approval processes. A buyer that funds purchases from its own capital, without a mortgage on your building, also removes one source of closing risk.

These are pools of capital raised from pension plans, endowments, insurers and wealthy investors. Some funds are dedicated to net lease property. Others buy it as one part of a wider real estate strategy. Many actively originate sale-leasebacks directly with operating companies.

What they tend to care about: hitting the return target promised to their investors. Return targets and use of borrowed money vary from fund to fund, which is why two funds can price the same building differently. Funds are often more willing than a conservative buyer to look at a privately held tenant without a credit rating, a specialized building or a company with a more complicated financial history, provided the price reflects the risk they see.

One practical point for a future tenant: a fund has a finite life and will eventually sell. The party that buys your building may not be the party that owns it for most of your lease. Lease terms should be written to work with any landlord, not only the one across the table today.

Section 1031 of the tax code lets an owner of real property held for business or investment exchange it for other real property of the same kind and, in general, not recognize gain on the exchange. The IRS notes that since 2018 this treatment applies only to real property. Many individual investors who have sold an apartment building or a piece of land look for a net leased property to buy as the replacement, because it produces income without day-to-day management.

What they tend to care about: meeting the deadlines of their exchange, a lease that requires little involvement from them and a tenant that looks dependable. They are often the most motivated buyers for a single, smaller property.

The trade-offs for a seller are specific. An exchange buyer under time pressure may pay well, but it may be a first-time landlord, may rely on a mortgage to close and may have less capacity to fund an expansion or solve a problem later. Ask how the purchase is being financed and what happens to your deal if the buyer's own sale falls through.

A family office manages the wealth of a single family or a few families. Along with other private investors, such as local real estate owners and high-net-worth individuals, family offices buy net leased property for long-term income. Industry sources describe them as long-hold owners, often thinking in generations, that use moderate borrowing and weigh tax and estate planning alongside yield.

What they tend to care about: preserving capital, steady income and real estate they would be comfortable owning if the tenant left. They are frequently reached through relationships, not through wide marketing, and decisions rest with a small number of people.

As landlords they vary more than any other group. Some are flexible and quick to say yes to a reasonable request. Others have thin staff and are slow. References from their existing tenants are worth asking for.

Whatever the category, a net lease buyer evaluates the same three things.

• Tenant credit: how likely your company is to keep paying rent and meeting the lease terms. An investment-grade rating is not required, but a record of solid financial performance or a strong market position is.
• The lease: its length, the rent, the increases and who pays which expenses.
• The real estate: whether the location and building could attract another tenant if you left, and how important the site is to your operations.

Different buyers weight these differently, and that is the main reason offers for the same building can be far apart. One buyer may pay up for a long lease. Another may discount heavily because the building is specialized. Showing the opportunity to several categories of investor is how a seller finds the one that values its particular combination most. That is the part of the process TAG runs on behalf of the occupier, and we treat the buyer's qualities as a landlord as part of the offer.

• ✓Where is the purchase money coming from, and does closing depend on a loan or on the sale of another property?
• ✓Has this buyer completed sale-leasebacks before, and can we speak with its current tenants?
• ✓How long does it intend to hold the building?
• ✓Who will we deal with for consents and repairs after closing?
• ✓Would it fund an expansion or major improvement in exchange for added rent?
• ✓What financial reporting will it require from us during the lease?
• ✓Has it retraded price during due diligence on past deals?

The highest price from a buyer that cannot close, or that will be a difficult landlord for the length of the lease, is not the best offer.