Ascension Advisory recently advised a family-owned landscaping company in the Midwest on the sale leaseback of a mission-critical operating property.
The company has been in business for more than 40 years, building a strong reputation in its local market and growing into an established provider of commercial landscaping and related services. Like many long-standing, family-owned businesses, the company had accumulated meaningful value not only in its operating business, but also in the real estate supporting its operations.
Following a challenging year for the business, ownership was focused on strengthening the company's financial position and reinvesting in the areas that would drive its next phase of growth. The objective was not to sell the company or disrupt its operations. Instead, the owners wanted to identify capital already embedded within the business that could be redeployed more productively.
Its real estate presented that opportunity.
The property functioned as an Industrial Outdoor Storage, or IOS, facility, providing the company with the combination of yard space, vehicle and equipment storage, maintenance capabilities and operational infrastructure required to support its landscaping business.
Through a sale leaseback, the company was able to monetize the property while remaining in place under a long-term lease, converting an illiquid real estate asset into capital available for reinvestment in the operating business.
Industrial Outdoor Storage has increasingly become an attractive segment of the industrial real estate market because the properties can serve highly specialized and operationally critical functions.
Unlike a conventional warehouse, the utility of an IOS property often extends well beyond the building itself. Yard configuration, access, outdoor storage capacity, circulation, zoning and proximity to customers, highways or population centers can all contribute materially to the value of the site.
Those characteristics can also make IOS properties difficult to replicate.
In many markets, zoning regulations significantly restrict where outdoor storage, vehicle fleets, heavy equipment and similar uses are permitted. Existing IOS sites may therefore benefit from zoning or permitted uses that would be challenging for a new operator to obtain today.
At the same time, many IOS users need to operate within very specific geographic areas. A landscaping company, equipment rental business, infrastructure contractor, transportation company or building materials distributor cannot necessarily relocate 30 or 40 miles away simply because cheaper land is available.
The real estate needs to work operationally.
For sale leaseback investors, that combination can be compelling:
These characteristics can create durable underlying real estate value while also making IOS properties particularly well suited to sale leaseback transactions.
For the family ownership group, the transaction demonstrated an important distinction between the value of a property to a traditional owner-user and its value to a sale leaseback investor.
An owner may naturally think about the property in terms of comparable land sales, replacement cost or what another local business might pay for the real estate on a vacant basis.
A sale leaseback investor evaluates the opportunity differently.
The investor is acquiring not only the physical real estate, but also a long-term income stream generated by the lease. Property quality, tenant credit, lease structure, rent, location and the strategic importance of the facility all factor into the valuation.
As a result, owner-operators are sometimes surprised by how much capital can be generated from real estate they may have owned for decades.
In this case, monetizing the property allowed the company to access capital without selling the operating business and without taking on traditional acquisition or growth debt. Just as importantly, the company maintained uninterrupted use of the facility that remained central to its operations.
The proceeds could then be redirected toward the operating business, giving ownership greater flexibility to invest following a difficult prior year and position the company for future growth.
For businesses with significant capital tied up in mission-critical IOS properties, a sale leaseback can provide a powerful alternative to leaving that equity trapped on the balance sheet.
The transaction does not change where employees report to work, where equipment is stored or how the company serves its customers. What changes is the capital structure.
A business moves from owning an illiquid real estate asset to controlling that same property through a long-term lease, while gaining liquidity that can be deployed toward equipment, acquisitions, hiring, working capital, debt reduction or other strategic initiatives.
For this family-owned company, the sale leaseback provided exactly that: an opportunity to unlock value accumulated over decades and reinvest it back into the business the family had spent more than 40 years building.
For investors, the transaction provided exposure to a difficult-to-replicate IOS property with a long-term operating tenant.
It was a structure that aligned the value of the real estate with the capital needs of the business, creating a compelling outcome for both sides.