Sale-Leaseback Capital

The dollar volume of sale-leaseback financing in 2010 should be similar to 2009, which was the lowest level of activity over the last 20 years. This diminished volume is directly attributable to the lack of availability of commercial real estate debt for "new" transactions. Although a number of lenders announced new lending platforms during the year, the pricing for this new capital increased the "risk premium" to as high as 500-600 basis point level above Treasuries, exacerbated by lower loan-to-value percentages and increased minimum credit standards. As a result, capitalization rates for single-tenant sale-leasebacks have risen past 8% for all credit and property types, an increase of more than 100 basis points from the end of 2008. Interest rates have been steady to down slightly from levels a year ago, thus offering some mitigation to the additional 100-200 basis point increase in "risk premium" required by active commercial real estate lenders.

Projected Volume
2010 volume will remain down dramatically with only investment-grade companies who are willing to enter into 20-year primary term leases being assured of completing transactions. Given the interest cost associated with commercial real estate debt, the only financing that will provide acceptable pricing will be CTL financing from insurance companies whose pricing is tied to the corporate bond market "spreads" – which have compressed significantly since the end of 2008. Build-to-Suit development for investment-grade companies will also be severely constrained by the lack of availability of capital (including CTL financing) as well as generally more stringent underwriting. Deals over $60 million and/or that take longer than 12-18 months to construct will be almost impossible to accomplish.

Current Pricing
Only corporations with solid balance sheets will be able to consider completing a sale-leaseback transaction in 2010. Pricing will be at least 100 basis points above 2009 levels, where going-in capitalization rates on completed deals exceeded 8%. Many "lesser credits" will find it difficult to complete a sale-leaseback transaction, at any price during 2009.

Return Expectations
Equity yields continue to move up, further constraining the ability to complete a sale-leaseback transaction. In addition, the percentage of equity required in a leveraged transaction now ranges from 35-50%, up from 20-25% at the end of 2008. Given the tighter real estate debt underwriting standards, as well as the wider "risk premium" for new loans, equity yields could increase by an additional 100-200 basis points during 2010.