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Exploring the Rise of Sale-Leaseback Deals Amidst Rising Interest Rates

In the face of the current interest rate climate, sale-leaseback arrangements are emerging as an increasingly appealing strategy for corporations. These transactions involve a company selling its property at market value and then leasing it back, enabling the continuation of its operations on-site under a long-term lease agreement.

Unlocking Capital Through Innovative Real Estate Deals

Sale-leaseback deals offer a mutually beneficial situation for both parties involved. For the buyer, it translates into a steady, bond-like income stream, augmented by the advantages of property ownership. On the other hand, the selling entity, which becomes the tenant, can liberate the dormant equity tied up in its property. This released capital can then be reinvested into the business for various purposes, like expansion or debt reduction.

Case Studies Highlighting the Trend

A notable instance of this trend occurred in early 2023 when NuStar Energy sold its headquarters in San Antonio to Truist Securities for a substantial $103 million, averaging $320 per square foot. NuStar agreed to a sale-leaseback deal, receiving the sale amount in a single payment while committing to a lease with incremental annual rent increases.

From a financial standpoint, such arrangements can be more advantageous than raising capital via the corporate bond market. For example, Truist Securities secured a 6.25% capitalization rate for a 20-year lease with NuStar, which equates to an initial annual return on the investment. Conversely, NuStar’s lease payments effectively substitute the interest payments that might have been incurred through bond market financing.

Another illustration is the 20-year sale-leaseback deal between Kiewit Corp. and a joint venture comprising Benderson Development Co. and CGA Capital. This deal encompassed four properties across Nebraska, Kansas, and Colorado, spanning 744,000 square feet, and was finalized at a similar 6.25% cap rate, totaling $507 million or $681 per square foot.

Future Outlook for Sale-Leaseback Transactions

Looking forward to 2024, the landscape of higher interest rates, a significant shift from the past decade and a half, is poised to encourage more corporations to engage in sale-leaseback transactions. By offering investors extended lease terms and a bond-like return, these corporations can effectively extract and mobilize operating capital from their real estate assets, adapting strategically to the evolving economic conditions.

Source: CoStar, Loan Analytics

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