Sale-leasebacks Poised to Continue Growth Trend in LA

Longpoint Realty purchased two sites totaling $17.5 million in a sale-leaseback.

Longpoint Realty bought two websites totaling $17.5 million in a sale-leaseback.

Firms that personal their very own industrial actual property are seizing a profitable alternative: Promote your actual property below a sale-leaseback settlement and get an inflow of money to develop the enterprise whereas remaining at that very same property.

Though the variety of industrial sale-leasebacks — a transaction sort through which a property is bought and leased again by the vendor — to this point this 12 months in L.A. County is decrease than final 12 months’s quantity, the greenback quantity is means up.

There have been 20 industrial sale-leasebacks in L.A. County in 2021 value almost $640 million, in contrast with 31 final 12 months for almost $473 million, based on information from CoStar Group Inc.

Specialists agree that the variety of sale-leasebacks is now growing, largely pushed by the excessive costs industrial properties are fetching within the present market.

“We’re seeing a ton of those transactions, particularly short-term sale-leasebacks the place folks can use the time to get out of the constructing and use the time properly to reap the benefits of the recent market,” stated Barbara Perrier, a vice chairman at CBRE Group Inc. “We’ve seen a whole lot of that exercise just lately. Greater than ever in my profession.”

Jeff Sanita, a senior managing director at Newmark Group Inc., stated he additionally sees a whole lot of sale-leasebacks, particularly since “the commercial market continues to be completely on hearth.”

“We’re principally out of product,” Sanita stated. “That’s actually pushed rental charges and deal phrases up and created a frenzied environment. On the customer facet, there’s a lot cash that wishes to get into industrial as a result of it’s been a secure harbor and is doing so, so nicely, even throughout Covid.”

Perrier stated one cause corporations are promoting now could be as a result of they’re being supplied “document costs.” She stated some corporations are getting unsolicited affords for greater than they realized the true property was value and “see it as a very good time to promote.”

Sanita agreed, including that some consumers are viewing a sale-leaseback “as a car” to encourage some corporations to promote.

A very good time to promote

This fall, Worldwide Tea Importers bought its properties at 2140 Davie Ave. and 5830 Triangle Drive to Longpoint Realty Companions in a sale-leaseback for $17.5 million.
Alexander Harrold, a vice chairman and senior director at Matthews Actual Property Funding Companies, was one of many brokers representing the vendor, who he stated noticed the benefits of promoting.

“We’re not solely seeing (the sale-leasebacks development) in SoCal however nationwide,” he stated. “The reason is, on the commercial facet, investments have elevated dramatically, in all probability 20% this 12 months alone. Sellers are realizing, hey, the worth is 20% greater than it was earlier this 12 months, individuals are keen to pay all money and be good landlords, and so they wish to put that $17 million again into the enterprise.”

Many corporations, Harrold added, “are higher off placing that cash to work” than having it sit in actual property, and so they can use the cash to broaden and on issues that herald a better return than what they’d save on hire.

“It’s a self-financing device,” Harrold stated. “It’s a strategy to get larger and higher and compete with opponents and develop.”

Matthew Mousavi, managing principal at SRS Actual Property Companions, agreed, calling it “an alternate financing construction.”

“A number of these house owners and operators, the businesses themselves, notice that we’re in a market or a window inside the market the place cap charges are at all-time lows, there may be an abundance of capital for this product sort, and it’s an opportunistic play to entry that capital; it’s a extra environment friendly use of that capital,” he stated. “A number of these corporations can improve their returns and have extra capital for his or her enterprise and rising their enterprise versus maintaining the true property property and all of the fairness tied up in the true property property. It’s a strategy to liberate that liquidity and put it to make use of and get extra of a return by investing it of their core enterprise.”

A very good time to purchase

Ted Evans, director of asset administration at Santa Monica-based industrial actual property growth firm and proprietor Dedeaux Properties, stated the corporate has accomplished a number of sale-leasebacks, together with short-term ones, prior to now few months and is all in favour of doing extra.

“We’re thrilled to do it as a result of it permits our workforce time to undergo the entitlements and municipal course of, which typically can take 12, 18-plus months,” Evans stated. “It permits us to get a little bit little bit of income whereas additionally benefiting who’s now our tenant by permitting them time to determine their subsequent steps.”

He added that generally, the lease agreements have been true triple internet leases the place the tenant paid for every thing from working bills to taxes.

Mark West, a senior managing director at Jones Lang LaSalle Inc., added that, particularly within the case of longer leases, sale-leasebacks have been a secure possibility for buyers.

“It’s a long-term, passive funding you can get an excellent return in your funding, and it’s long-term, secure money circulation that’s often rising yearly or each 5 years,” West stated. “It’s extra like a bond than an actual property transaction.”
Perrier agreed.

“From a purchaser perspective, the profit is that they’ve an earnings stream, which might be long-term or short-term,” she stated.

Steve Lurie, an actual property companion within the agency Greenberg Glusker Fields Claman & Machtinger, added that lease charges have been typically market rents and, due to this fact, fascinating to consumers.

For the Worldwide Tea Importers sale and lots of prefer it, Harrold stated, there may be one different situation at play: Many funds are receiving endowments or investments particularly for industrial actual property.

These consumers are searching for industrial actual property alternatives, that are in brief provide, and sale-leasebacks can create new alternatives.

Extra to return

Whereas specialists agree that sale-leaseback agreements are profitable to each consumers and sellers, that doesn’t imply they’re with out some drawbacks.

“The most important unfavourable to purchasing long-term, 15- to 20-year leases is … if it’s in a market the place the rents are actually rising very, very quick, you’re going to set the hire for the following 15 or 20 years, so if the market is actually, actually excessive and rental charges are transferring up and in three years the hire goes up 25%, you possibly can’t transfer the rental price till the lease matures,” West stated.

Lurie added that there are additionally some tax disadvantages.

The vendor, he stated, must pay capital beneficial properties taxes and can be paying hire as a substitute of constructing an typically tax-deductible curiosity fee. Nonetheless, Sanita stated, some lease funds might be written off as a enterprise expense.

The vendor, Lurie stated, additionally loses some flexibility by leasing and never proudly owning the property. That lack of flexibility, based on Harrold, might be a difficulty, too, if an organization signal a long-term lease and the enterprise begins doing poorly.

There can be extra sale-leasebacks within the industrial market transferring ahead, nonetheless, specialists say.

Mousavi stated the dearth of latest industrial product coming to L.A. means the market will proceed to be tight.

Within the third quarter, there have been almost 4 million sq. toes of commercial product below growth in L.A. County, based on JLL — a small quantity when you think about that the market totals 778 million sq. toes.

“That can proceed to maintain costs very robust as we go into 2022 and 2023,” Mousavi stated.

Sanita agreed, including that he didn’t see the commercial market slowing down, and sale-leasebacks have been a means of getting new sellers.

Matthews’ Harrold added that as “proprietor/operators begin to see the values proceed to go up, it’s going to be much more attractive to them to promote.”

“Persons are going to get extra as a result of they’re going to get approached by different brokers and house owners who’re determined to personal one thing like this,” he stated.

Proper now, there may be a whole lot of capital available in the market, based on JLL’s West, that means some huge cash out there for acquisitions. And one other issue contributing to the rise in sale-leasebacks is the speed at which corporations are rising.

“You probably have the company customers which are persevering with to develop, and the financial system is constant to develop, which we’re experiencing now, then I’d anticipate for it to extend as nicely,” West stated. “All issues are pointing in the correct course for extra sale-leaseback exercise.” 

High 5 Sale-leasebacks of 2021

2850 E. Del Amo Blvd., Carson
CenterPoint Properties
Vendor: Common Logistics
System Inc.
Sq. toes: 264,450
Sale worth: $126 million

17411 Valley Blvd.,
Metropolis of Business
Scout Capital Companions
Vendor: Sweda Co.
Sq. toes: 350,256
Sale worth: $117 million

15005 Northam St.,
La Mirada
LBA Realty
Vendor: Worldwide Paper Co.
Sq. toes: 236,069
Sale worth: $95.5 million

5102 Business Ave.,
Pico Rivera
Black Creek Group
Vendor: Howard’s TV & Equipment
Sq. toes: 172,344
Sale worth: $63.1 million

8500 Mercury Lane,
Pico Rivera
CenterPoint Properties
Vendor: GRM Doc Administration
Sq. toes: 173,134
Sale worth: $63 million

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