How To Leverage Your Commercial Lease Into Cash For Your Company

esrblogimgIf your company has quality credit, there are opportunities to procure cash in exchange for a long-term leases. Cap rates have compressed in key distribution markets and investors are strongly competing for credit industrial leases. Sophisticated tenants are maximizing and leveraging this demand into excess cash when leasing large distribution centers. This cash can be used for Material Handling Equipment (MHE), Building or Tenant Improvements (TI), IT infrastructure, or reduced rent. Here are four different financial scenarios that a company could potentially utilize:

  1. Developers usually price a new build-to-suit to a certain yield and then refinance or sell the asset once the lease is signed, thus creating an even better yield. Tenants may require that once a projected yield is achieved, they receive a portion of the profit, which exceeds the targeted yield (carried interest).
  2. Tenants may place an existing building under contract and during due diligence find an investor to purchase the building with their long-term lease in place. In some cases, the Tenant can garner significant cash because a building is worth much more with a lease in place than vacant. In this scenario, the tenant never owns the building.
  3. Tenant locates a non-developer controlled site and secures a forward takeout from a financing source. This forward takeout can include the up-front costs of the land and building. This process will yield the lowest rent possible.
  4. Tenant signs a Credit Tenant Lease (CTL), which is bond-like, and may include FF&E and MHE costs amortized into the lease. Typically this scenario will produce the lowest lease rate and the Tenant may even be able to take ownership of the building after a 20-year period.

E Smith Realty’s industrial team has successfully led several retailers through this site selection process. Read more about our experience in selecting and securing DCs for retailers or for questions contact: Brad Struck, SIOR, President, Industrial Services for E Smith Realty.