In pursuit of a cash infusion, an increasing number of businesses across L.A. County are selling their largest assets — the buildings they occupy — then signing long-term leases to remain in those spaces.
These so-called sale-leaseback deals have been prompted by last year’s changes in federal tax law, which allows companies to continue operating as usual while unloading assets that no longer hold tax benefits.
In the last four quarters, there were 29 sale-leasebacks in escrow or under contract in L.A. County. That’s up from 15 such deals in the previous four quarters, according to data from CoStar Group Inc.
“Operators are becoming more and more aware of the benefits of sale-leasebacks,” said Reed Melillo, a senior director with Westwood-based James Capital Advisors Inc., which has represented chains nationwide in sale-leasebacks of numerous locations.
Electric vehicle developer Faraday & Future Inc. sold its Gardena headquarters at 18455 S. Figueroa St. to Atlas Capital Group last month for an undisclosed sum. The distressed company is now leasing the building. Faraday didn’t return requests for comment on the deal.
Covenant Care Inc. sold a portfolio of four nursing facilities, including one in Huntington Park, to CareTrust REIT Inc. for $43.9 million earlier this year. The Orange County-based health care services provider is now leasing back three of the four buildings, according to CoStar.
And fast-food chain Del Taco recently sold 8,800 square feet of commercial land out from under one of its locations in Santa Monica to a family trust for $5 million. It still owns the building and signed a 20-year lease for the grounds.
“They didn’t want to have a lot of capital tied up in the real estate,” said Peter Deltondo, senior vice president of investments at Marcus & Millichap Inc., who represented Del Taco in the deal. “They make their money out of their business,” he said.
Prior to 2018, business owners could deduct all interest expenses related to the purchase of a building. Now, companies with annual gross receipts of more than $25 million can deduct no more than 30 percent of earnings before taxes, depreciation and amortization.
“For certain operators who had a large benefit from interest deductibility, they lost that benefit, which makes owning the property and having debt on that not as attractive,” Melillo said.
Sterling Champ, an executive vice president at CBRE Group Inc., said an update to federal accounting standards this year also encourages sale-leasebacks. It used to be that if a business sold a property for a profit, it recognized the gain over the time it leased the property back. Now, Champ explained, some businesses can take the full value all at once.
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