Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
Some major chain restaurants across the country are selling their real estate and leasing the space back, investing the equity in their businesses as they adjust to a tax law change that trims deductions on owned property.
In the past six months alone at least $500 million in restaurant sale-leaseback deals, involving national chains such as Chili’s, Pizza Hut and Outback Steakhouse were signed across the US.
Sale-leasebacks allow restaurant operators to recapture capital that they’ve invested into their real estate, and put it toward other areas of their business including opening new locations, remodeling their eateries or paying down debt.
Let’s not forget that these restaurants write their own leases which gives them financial and operational control of the real estate into the future.
Retail store chains and grocery stores are also increasingly getting in on the trend. Look for more sale-leasebacks from Sherwin-Williams, convenience-store operator 7-Eleven, and supermarket owners Supervalu and Albertsons.
While the sale-leaseback phenomenon isn’t new, the stage is set for further growth following recent changes in tax laws.
Prior to tax changes that took effect in early 2018, some business owners preferred to lock in costs by purchasing the real estate in which they operate, and tax laws allowed them to deduct all interest expenses related to those building purchases. When the tax laws changed, that interest deductibility – for companies with annual gross receipts of more than $25 million – was reduced to an amount representing no more than 30 percent of earnings before taxes, depreciation and amortization.
As a result, businesses may shift strategies and sell the real estate in which they operate to investors and lease it back from them which essentially eliminates the interest expense tied to a mortgage. The cost then becomes a lease expense, which generally remains fully deductible.
For buyers of these properties, they typically know that the restaurant has some operating history at the location and that the business can support the rent being paid.
1031 Exchange investors may ultimately be the big winner here. Because NNN leased properties are the historical favorite when a seller is hunting for a replacement property in an effort to avoid paying taxes on their recent property sale. To learn more about 1031 Exchanges, click here to get a free copy of my book True Wealth: What Every Seller Should Know About 1031 Exchanges.
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About Beau Beach, CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 414.324.4938, 615.603.9770, click to schedule a call or Beau@ProwessIRES.com