Selling your warehouse and leasing it back

How a sale-leaseback works

You sell your building to an investor and, at the same closing, sign a lease to stay in it. The investor buys an income property with a tenant already in place; you convert owned real estate into cash and a long-term lease. The sale price and the lease are negotiated together, because the lease is a large part of what the investor is buying.

It's one of three paths for an owner-occupier's building, alongside selling outright and moving, or keeping it and leasing it to someone else. The sell or lease out tool compares all three on your own inputs, and the sell or lease out guide explains the reasoning.

Why owner-occupiers do it

• Capital. Equity in the building becomes cash for expansion, equipment, acquisitions, debt repayment or succession.
• Balance sheet. Real estate comes off your books and cash comes on, though under some accounting standards the new lease itself appears as a liability. Ask your accountant how it would look for you.
• Focus. You stop being a property owner and put management time and money into the business.
• Continuity. Unlike a sale with vacant possession, you don't move, and customers and staff see no change.

What investors look for

Buyers price a sale-leaseback mainly on the income and how secure it is:

• Tenant covenant. Your company's financial strength. Expect to share financial statements, often for several years, and possibly to offer a parent or personal guarantee.
• Lease term. Longer terms generally attract more buyers and support a stronger price.
• Lease structure. Net leases, where the tenant carries operating costs, property tax and insurance, are generally what investors expect.
• The building. Location, clear height, loading, condition, land-use district, and how easily it could be re-leased if you left.
• Environmental condition. A Phase I Environmental Site Assessment is standard due diligence on an industrial purchase, and lenders commonly require one.

Price and rent move together

This is the core trade-off. Investors value the building on the income it produces, so a higher rent in the leaseback generally supports a higher sale price, but you pay that rent every year of the term. A lower rent keeps your occupancy cost down and lowers the price. A longer term and a stronger covenant generally improve the price at the same rent.

Model it at more than one level before you settle on a number. Compare the capital you receive with the rent you'll pay over the term, what that capital can earn inside your business, and what continued ownership would otherwise have given you.

Negotiate the leaseback before closing

Once you've sold, you're the tenant and the investor holds the pen. Settle the full lease as part of the purchase agreement and sign it at closing. Cover:

• Rent, and how it changes over the term.
• Term, plus renewal options that let you stay as long as you might need.
• The net structure: what's in operating costs, and who pays for the roof, structure and major systems.
• Assignment and subletting rights on reasonable terms, so you can sell the business or shrink.
• Early-termination or expansion rights, if your plans could change or the site has room to build.
• A right of first refusal or first offer if the investor later sells.
• Alterations, and what you must remove or restore at the end.

What you give up

The seller gives up future appreciation and control of the property. That's the price of the capital. In practice it means alterations, expansion and redevelopment need the landlord's approval; a long lease is a long commitment, and exiting early is costly; at renewal the rent resets, so occupancy cost is only certain for the term; and you lose the option to borrow against the building later. If any of those would hurt, negotiate for it now or consider the alternatives.

Tax questions for your accountant, and next steps

The tax consequences need an accountant before you sign anything. Ask about capital gains on the sale and recapture of capital cost allowance claimed on the building; GST, since the sale of commercial real property is generally subject to GST and a GST-registered purchaser generally self-assesses; how deducting rent compares with the depreciation and interest you claim now; and which entity sells and which signs the lease, if a holding company owns the building and an operating company occupies it.

Alberta has no land transfer tax, though Alberta Land Titles charges registration fees on a transfer based on value. For the sale process itself, see how to sell a warehouse, then start at Sell.

Before you commit to a sale-leaseback

• Am I confident the business will stay at this location for the lease term?
• Have I modelled price against rent at more than one level?
• Are my financial statements ready for an investor's review?
• Is the full lease agreed as part of the purchase agreement?
• Do my renewal, assignment and subletting rights fit my plans?
• Who pays for the roof, structure and major systems?
• Am I ready for the buyer's Phase I ESA and building review?
• Has my accountant reviewed capital gains, CCA recapture and GST?
• Which entity sells, and which signs the lease?