Sale-Leaseback Arrangements Provide Attractive Fundraising Opportunity Amid Cooling Markets

The sale-leaseback market in the United States has been a popular way for property owners to monetize their real estate assets while retaining use of the property. Driven in part by low interest rates (making it easier for buyers to purchase) and high property values (making sales more attractive to sellers), the pandemic years broke records across sectors for sale-leaseback deals.

However, the sale-leaseback market is not immune to the impact of recent inflation and interest-rate changes and trends. As interest rates rise (and investors weigh the risks of both inflation and future interest-rate increases) and property values are relatively high, many property owners are considering sale-leasebacks as an alternative fundraising mechanism rather than seeking financing or paying off existing debt.

This is especially true of property owners who saw rapid value increases during the early pandemic years. There are still many potential buyers for sale-leaseback deals. With market uncertainty, sale-leaseback deals make an attractive investment, especially for long-term lease deals, where a potential future landowner can hedge against short-term changes in rental markets.

At Ballard Spahr, we anticipate market changes will continue to make sale-leaseback deals attractive throughout 2023, especially in certain sectors.

For example, in the commercial sector, while rising interest rates may lead to a slowdown in transaction volume as investors become more cautious about the cost of borrowing, there will likely be opportunities for investors with reliable cash on hand. As tenants demand lower rent payments to compensate for the increased borrowing costs and inflation, investors may see the opportunity to negotiate lower purchase prices in markets that would have faced uncertain bidding wars just last year, namely pricy coastal and urban areas. Similarly, for many investors, single-tenant retail, fast-food franchise portfolios, manufacturing, and warehouse-logistics sale-leaseback deals remain attractive and potentially provide an opportunity for sellers to free up cash without facing high borrowing costs.

In the public land sector, rising interest rates could impact the availability of land for sale-leaseback transactions, as local governments and public entities may be less willing to sell land at lower prices when financing costs are higher. Additionally, rising interest rates could impact the terms of lease agreements for public land, potentially leading to higher rents or shorter lease terms. However, if inflation and interest rates impact tax revenues, government entities may be willing to make sale-leaseback deals as an alternative to raising funds through actions such as raising taxes and bond measures that risk voter fatigue or backlash.

In sum, while rising interest rates and inflation may soften the overall sale-leaseback market compared to the highs of last year, it is likely that market changes will impact the type of property sought after in the sale-leaseback market, rather than simply having a blanket cooling effect. Furthermore, note that the market is influenced by a variety of factors beyond just interest rates and inflation- property values, supply and demand dynamics, and other macroeconomic factors can also play a role in shaping the sale-leaseback market.

At Ballard Spahr LLP, we have a national team of experienced sale-leaseback attorneys, representing owners, buyers, lenders, and other players. Please feel free to reach out to our real estate teams.

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