When an investor is looking for a management free investment, nothing can beat a sale/leaseback. This is the ideal investment for an absentee owner because the tenant pays all the operating expenses and the investor-owner usually has a completely management-free and trouble-free investment. Typically, the tenant–who is the former owner–will take care of the property. Therefore, a sale-leaseback can be an excellent investment. Watch out though! Make sure that the tenant is dependable and able to pay the rent regularly and promptly.

The Transaction

Let’s say the Smith Corp. owns and operates a manufacturing plant. The corporation wants and needs to free up the capital invested in the plant for other corporate uses. So, Smith Corp. offers to sell the building and lease it back from the new owner.

Result: The buyer gets a fully leased property, with an experienced and known tenant already in place.

It sounds good, but here are some things the buyer needs to take a very close look at:

What You Need To Check

Tenant stability. The rental income and the profitability depend on the success of the tenant. A stable, top-rated tenant with a history of past performance is the best kind of tenant to have in a sale/leaseback. Try to determine whether the tenant has any reason other than to free up capital for wanting to sell the building. Is the Smith Corp. getting ready to relocate to another part of the country? Is the product manufactured in this plant being removed from its product line? Is the company in financial trouble and is in need of the cash to try to survive?

Building Design. Be careful of single purpose buildings. If Smith Corp. must close its doors, will the building be usable by another tenant without a major overhaul?

Location. Is the building located in an area suitable for other tenants in the event it must be re-rented?