Traditional Lending Challenges: Commercial real estate has long relied on traditional loans from banks, but some in the market believe that obtaining traditional loans has become increasingly difficult due to higher interest rates and other factors.

Sale-leasebacks as an alternative financing option: Many in the commercial real estate sector are aware of alternative financing options but may not be familiar with sale and leaseback transactions. These transactions can offer higher funding amounts compared to traditional loans while allowing businesses to retain operational control of the real estate.

How sale and leaseback transactions work: In a typical sale and leaseback transaction, a business sells its property to a third party, often a real estate investment trust (REIT) or other commercial real estate investor, which third party then leases the property back to the seller. The lease is usually an "absolute net" or "triple net" lease, meaning the tenant handles all property-related obligations, including insurance, maintenance, repairs, capital expenditures and legal liabilities. 

Advantages of sale-leasebacks:

• Higher Valuation: The determination of the rent for the leaseback and, thus the purchase price for the sale, are determined by the business decision makers at the outset of the transaction. Property valuation in these transactions can be higher than traditional loans, as it is typically based, at least in part, on the rate of return that the buyer will receive from the rental stream after closing and may not be limited by a loan-to-value requirement like a traditional loan.  
• Flexibility: The tenant may have significant freedom to operate, manage and modify the property, subject to lease terms.
• Construction Funding: Some sale and leaseback investors offer construction funding, which works much like a construction loan with funds being disbursed in instalments to pay for the cost of the work as it is completed. The construction funding amount may also be underwritten based at least in part on the final rent and therefore may support a higher amount than a traditional construction loan would.

Innovative Structures: Even those familiar with the traditional sale and leaseback transaction structure may not be aware that certain sale and leaseback buyers are willing to acquire a property that the ultimate tenant does not yet own. One way to structure a transaction like this the tenant transferring its right to acquire the property to the sale and leaseback entity at closing. There are specific legal considerations that must be taken into account when negotiating these complex transactions and the sale and leaseback buyer should be consulted prior to entering the agreement to ensure their specific considerations are addressed.