Sale-Leaseback deals are on the rise – writer debut

Note from the editor: please welcome our newest writer, Erica Ramus to the Agent Genius family. Erica is the Broker/Owner of Realty Executives in Pottsville, PA and teaches real estate licensing courses at Penn State Schuylkill. Erica is the founder of Schuylkill Living magazine and has a strong background in publishing and marketing.

Erica is a veteran blogger who has been writing about residential real estate, but she makes her debut as a commercial real estate writer here on Agent Genius because of her innovative mindset in an industry unwilling to change. We look forward to learning a great deal from Erica, please welcome her in comments!

A bad market

The commercial market is in the toilet. That’s not my analysis–that’s the word straight from “expert sources” such as CNN and The New York Times’ real estate section.  Building owners who thought they were holding crown jewels just a few years ago now may be sitting on white elephants. (See Lani Rosales’ article America’s ten worst commercial real estate deal busts.)

Properties that would have been snapped up by investors in a few months at the peak of the real estate boom are now sitting there, waiting for someone to just LOOK at them.

In my small part of rural America, the statistics mirror the rest of the country: we sold half as many commercial properties here in northeastern Pennsylvania (Q1) than we did in 2005’s first quarter, and the dollar volume was also less than half 2005’s numbers.

What property owners have to do:

Commercial property owners must be patient — or get creative — to sell their properties in 2010.

One trend I see is an increase in Sale-Leaseback deals. When I teach real estate licensing, students stutter over this concept at first. Why sell a building if you don’t want to move? Why not just continue paying the mortgage? Why would anyone want to SELL and then pay RENT to a landlord?

This concept is hard to wrap your mind around since many people think the benefit in owning a property is, well, in OWNING it. To be the building’s OWNER (and not merely a tenant) is what everyone should aspire to, right?

Here’s how it works:

Not necessarily. In many cases the owner needs cash. Perhaps business is down, and they could afford to pay the mortgage. But they could use a chunk of cash even more! Maybe they need to upgrade equipment. Or they just don’t want the overhead of a mortgage plus building maintenance/upkeep. Perhaps they just need to pull cash out of the property for another purpose. It doesn’t matter why the owner wants to sell.

If the seller also wants to STAY in the property as a tenant, a sale-leaseback deal would accomplish his goal. He gets a lump sum (assuming there is any left after any mortgages are paid off). He stays in the building, with no maintenance or ownership issues. Capital is freed up to do whatever he wants with it.

An investor buys the building, and has a built-in tenant from day one. Normally the seller agrees to a long-term lease. The rent will be dependent on the area’s prevailing rental rates, the seller’s credit rating, the length of the lease, and the investor’s desired rate of return.

We rarely saw many of these in the flying high days of easy sales. Sellers just put a sign on the property and (at least in our area) out-of-town investors would swoop in and pick up the commercial deals.

Those times are now referred to as “the Good Old Days” — and they are long gone. In 2010 we have to think outside the box to get some of these properties sold.

Photo courtesy of amagill on Flickr.com.