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Commercial Real Estate

Sale-Leaseback deals are on the rise – writer debut

erica ramusNote 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

3367543094_470e356692The 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.

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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.

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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.

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Written By

Erica Ramus is the Broker/Owner of Ramus Realty Group in Pottsville, PA. She also teaches real estate licensing courses at Penn State Schuylkill and is extremely active in her community, especially the Rotary Club of Pottsville and the Schuylkill Chamber of Commerce. Her background is writing, marketing and publishing, and she is the founder of Schuylkill Living Magazine, the area's regional publication. She lives near Pottsville with her husband and two teenage sons, and an occasional exchange student passing thru who needs a place to stay.

18 Comments

18 Comments

  1. BawldGuy

    April 8, 2010 at 11:05 am

    Amen Sister! You’re a welcome addition here. Good luck.

  2. Benn Rosales

    April 8, 2010 at 11:13 am

    Erica, so grateful to have you here finally. I love when common sense truth is spoken to power. I wonder sometimes is it pride, stupidity, the bank, or what is it that stops creativity from happening in commercial. OR maybe they are creative and we’re just not seeing it. All I’m reading from most in the commercial or even REITs is ego- it’s difficult to feel sorry for ego.

  3. Matt Stigliano

    April 8, 2010 at 3:34 pm

    Erica – Nice to see some Pottsville flavor in AgentGenius. Every time I see your name, I was always wish I was holding a Yuengling. There are some things I don’t miss about PA.

    I never quite thought about the sale-leaseback being a way forward. It does make sense the way you lay it out, although I have to wonder how many owners would love to sell, but know they won’t get what they need out of the sale (in terms of cash).

    I’m no commercial expert, but I do know that when BawldGuy gives you an amen, you must be onto something.

    Look forward to learning more about commercial real estate, especially from a PA writer.

    Did you hear that Bill Lublin? There’s more people from PA working their way into AgentGenius – our takeover should be complete on schedule.

  4. Missy

    April 8, 2010 at 5:58 pm

    Hey girl, welcome to Agent Genius. Glad to have you and your experience on board.

  5. Erica Ramus

    April 8, 2010 at 6:45 pm

    Thanks for the welcome, BawldGuy, Benn and Missy.

    Matt–If a heavy rectangular box comes via UPS, don’t shake it before opening.

  6. Ken Brand

    April 8, 2010 at 8:56 pm

    Sharing how “stuff” gets done, sweet. Cheers & Welcome.

  7. Austin Homes For Sale

    April 9, 2010 at 3:05 am

    I have to wonder how many owners would love to sell, but know they won’t get what they need out of the sale. i was wondering also??

  8. Austin Homes For Sale

    April 9, 2010 at 3:06 am

    nice article Great Job

  9. property to rent

    April 9, 2010 at 3:19 am

    I never quite thought about the sale-leaseback being a way forward. It does make sense the way you lay it out, although I have to wonder how many owners would love to sell, but know they won’t get what they need out of the sale

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