

Sansome Pacific Properties and its JV partner recently paid $324 million to acquire 11 Cabela’s properties. No, the private real estate investment firm isn’t branching out to sell fishing and hunting gear. It was a pure real estate investment play. Sansome Pacific purchased the properties as part of a sale-leaseback transaction from Cabela’s parent company, Bass Pro Shops, in what is likely the largest commercial real estate transaction completed on a digital platform.
A sale-leaseback is a real estate transaction that is popular with both real estate investors and end users, or those businesses that operate in those properties. A sale-leaseback is a two-part transaction that works just like its name suggests. The property owner enters into an agreement to 1) sell the property to a buyer and 2) lease the property back from the buyer, usually for an extended period of 15-20+ years.
Business owners use sale-leasebacks as a financing tool. Effectively, a sale-leaseback allows a business, a sale leaseback allows a business such as Cabela’s to “monetize” capital tied up in their real estate, which they can then use to reinvest in the business, pay down debt, or finance new store growth. At the same time, it’s business as usual for those Cabela’s locations. The franchisee maintains its rights to continue operating those locations; they simply shift from property owner to tenant. Sale-leasebacks are an attractive alternative to putting a mortgage on a property, because a sale-leaseback allows a business to pull 100% of their equity out of a property, whereas a typical bank loan would only cover 60 to 70% of the property value.
Real estate investors like sale-leasebacks for a variety of reasons. One of the attractive features is that it provides a nice package deal. The buyer gets the property and the tenant all rolled into the same transaction. In the case of an existing property, the tenant is a proven entity with a long operating history in that location.
Investors also like sale-leasebacks because they are typically structured with long-term triple net (NNN) leases where the operator (now tenant) is responsible for paying expenses, including property taxes, insurance, utilities, and taking care of routine maintenance. What that creates is a passive investment – no day-to-day phone calls or management headaches – and a steady, consistent income stream from the monthly rent payments.
Sale-leasebacks are common across different property types, industries, and price points. Examples run the gamut from industrial facilities, restaurants, retail and service businesses, medical office buildings, banks, supermarkets, grocery stores, and many others. Likewise, there’s a long list of businesses that utilize sale-leasebacks, including household names such as Amazon, FedEx, McDonald’s, Dollar General, and Walgreens.
Location, location, location is one of the basic principles of real estate. Although location and quality of real estate are still important factors in sale-leaseback transactions, an equally important mantra is credit, credit, credit. Because sale-leasebacks are leased back to a single tenant, the sale price, ROI, and risk associated with that investment are all highly dependent on the credit of that tenant. The strength of the tenant and length of the lease term are key factors driving sale prices and cap rates for investors.
“A” credit tenants, such as a McDonald’s, Walgreens, and Amazon are highly sought after and demand top pricing. Lease agreements are effectively a corporate guarantee of payment. If you buy a Walgreens location in a sale-leaseback transaction where Walgreens signs a 15-year lease, that lease acts much like a corporate bond. Walgreens is agreeing to pay that rent even if they decide to close that location five or 10 years into that lease.
At the same time, investors have to be mindful of leasing risk, especially when that tenant has weak credit. It’s highly unlikely that Walgreens is going to go bankrupt and default on its lease agreement. However, there is inherently more risk when doing a sale-leaseback with a smaller operator or independently-owned business, such as Joe’s Pharmacy. As such, it is important for investors to conduct careful due diligence on the real estate and the financial strength of the tenant to make sure you’re comfortable with the risk and risk-adjusted return.
If you’re looking for sale-leaseback properties, or considering a sale-leaseback for your business, our brokers can help you every step of the way. Contact us today for sale-leaseback advice.