EP132: The Art Of The Sale Leaseback Free Roll - A Conversation with Chelsea Mandel

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[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit podcast. Today I'm here with Chelsea Mandel. She is the founder of Ascension Advisory. And we're gonna talk about, how real estate can play a role in the mergers and acquisition games. More specifically, sell leasebacks. Thank you for being on the show today.

[00:00:16] Chelsea Mandel: Thank you. I'm happy to be here. 

[00:00:18] Ronald Skelton: I always start off with kind of the, the origin story. Give us a little bit of your life history. My joke has always been, I'm sure the listeners are finally getting sick of this thing is, you were born and then you ended up on a show about mergers and acquisition. Can you fill out the gap in between? How did you, how did you start developing, yourself into this niche? 

[00:00:37] Chelsea Mandel: Yeah. So I actually started in, more traditional real estate, private equity. So I was an acquisitions analyst at Starwood Capital Group. Mostly buying, at the time it was a lot of, malls, distress malls with value add opportunities and multifamily deals.

[00:00:51] And so that's kind of my first, entrance into real estate. It was really just pure play real estate. No credit angle to it. And then a couple years in there, I was recruited to actually join a private equity firm in New York City called New Mountain Capital. And so this was a, a credit private equity firm. They had a private equity strategy, a credit strategy, a hedge fund at the time. And they were looking to launch a sale leaseback and net lease platform really getting into the real estate strategy through, the broader kind of credit focus of sale leasebacks. And so I was the first employee hire there. Was working for the portfolio manager.

[00:01:26] Super exciting. I was really young. I was like 23 at the time. They were launching a new fund, but it was a new fund in that new strategy but, with the backing of this broader, mature, really stable private equity firm with a great reputation. And it was exciting to me because you kind of had the best of both worlds. It was a startup entrepreneurial environment in terms of that fund, but mature enough that you didn't have a lot of the, the downside risks that you have as an actual startup company. So I joined that firm. I joined the fund. We raised about half a billion dollars in capital for a first time fund, which was pretty awesome.

[00:01:59] And we just started buying deals. All sale leasebacks, I would say was mostly industrial. Mostly with other middle market private equity firms. So I was really getting used to, and understanding and being able to underwrite, like sponsored levered credits, middle market companies. These weren't like publicly rated public companies. These were businesses that you really had to understand and, kind of get your hands dirty to understand a balance sheet and the investment thesis, et cetera. And so I was there for a couple years. Again, focus on purely sale leasebacks to, the point where I said, this is really exciting, but I actually wanna be on the other side, of this opportunity.

[00:02:35] And so that's when I joined an advisory firm, a real estate brokerage firm that was focused on sale leasebacks. That firm was called Stream Capital Partners. I was there for a couple years. This was my first opportunity as a broker and nobody really understood why I was going from being, on the investment side to brokerage. But it was exciting for me. The entrepreneurial angle was there. You really have like an unlimited uncapped upside and that was exciting. And so, I joined that firm. I opened up a New York office and I was there for about three years. I did about a billion dollars in sale leasebacks. And then after that, kind of had the same, entrepreneurial itch and just wanted to go at it. Really doubled down on myself and on, the reputation that I built in the sale leaseback space.

[00:03:15] And I left that firm and I started Ascension a couple months later. And so we're about a year and a half in. And focused similarly on corporate real estate and sell leasebacks in, pretty much the middle market and lower middle market space. So super abbreviated, but that's the high level.

[00:03:29] Ronald Skelton: Oh, cool. Real quick before we get too far into this. Explain what a sale leaseback is for anybody that may not know. 

[00:03:36] Chelsea Mandel: Yeah, great place to start. So basically a sale leaseback is when a business or a private equity owner or sponsor of a business sells its company owned real estate that, we consider to be mission critical to the operations. And, in exchange for getting that large, cash proceeds up front, they enter into a long-term lease.

[00:03:54] And so you're basically going from being an owner to being a tenant. And you retain all the operational flexibility and control of that property and of your location through that lease agreement. But the benefit is that typically you have, a higher and better use for your capital than being tied up in property. And most of the time you're executing this transaction at a multiple where the valuation or the implied multiple is much higher than the EBITDA multiple of the business. So you're basically selling a non-core asset at a higher multiple than where the broader business would trade, which results, in the business, basically seeing some equity value creation.

[00:04:29] Ronald Skelton: Yeah, I've noticed that you can actually get a little bit of a premium through a sales leaseback as opposed to just selling it on the open market. Especially if they're on a high revenue business. If your business is making good money, that's more of a determining factor than necessarily, what are the comps in the neighborhood. Right? They come into play, don't get me wrong. But I just noticed that, we're getting a little bit better a prize, on those. 

[00:04:54] Chelsea Mandel: Definitely. I would say the sale leaseback, it's two components. It's credit and it's real estate. The real estate really being secondary to the credit.

[00:05:01] So from an underwriting standpoint and from a methodology standpoint, we look at valuation by really looking at three factors. So the first and most important being the credit of that operating business. So we're understanding the financials, the sponsorship, the balance sheet, leverage profile, et cetera. And then second, most important, even before the real estate is why is this property mission critical to the operations of the company? So, is the tenant, super sticky? Can they not reproduce this, location from a replacement cost standpoint? So they have tons of equipment here. Are they approximate to, suppliers and customers?

[00:05:34] All these reasons that make this property really important to the business, that creates value over and above, what the actual building is worth. And so, yeah, when you look at the sale leaseback value compared to the just, broad real estate, market fair value. Typically it's significantly higher, and that spread can be really meaningful, especially when we talk about, potential acquirers of these businesses.

[00:05:55] Ronald Skelton: So I'm gonna have you, potentially correct one of the myths I might be portraying out there.I've been telling people come to me and they ask about these and I refer off. One of the things I do is I kind of have this little campaign. I know a guy, I know a gal. And it's like if you get stuck in an m and a deal, you can't find the financing or you're, you're stuck in it and you need an advisor. If you're willing and able to pay for that help, don't be stuck. 

[00:06:17] Reach out to me. I've interviewed over 150 people. I probably know somebody. I know a guy or a gal that can help you out. And so I do get a lot of, people asking for funding and I ask if, the first thing I always ask is, they have real estate. And depending on the business, the only time I won't refer somebody over to a company like yours is if that real estate is absolutely critical to the business. Like, one of the guys bought a golf course. I was like, I don't know if I would sell on leaseback my golf course. Cause the real estate is the business, right?

[00:06:44] Chelsea Mandel: I would, yeah, I would disagree. I would say those are the best sale leaseback candidates. Because what you're saying to me, if that building is absolutely critical to the business, is you're saying you're never gonna leave.

[00:06:54] So a 20 year lease is obviously long, but you're basically saying, you can't ever leave. You really have no option. So if I'm an investor of sale leasebacks, I'm willing to pay more for that building than what I know the building is worth, because I feel so confident in the certainty of that long-term lease and you renewing that lease forever. Because what you know, alternative do you have if it's so important to the business? So from a business owner standpoint, typically they can get the same level of control. And, operational flexibility through a long-term lease than they can with ownership. And they're doing it at, again, a creative multiples creating substantially more value than what the property's actually worth that they could then invest back into the business with actually, which actually carries like an ROI associated with it.

[00:07:39] So I think as long as you're structuring the lease right through an advisor, you're setting up a long-term lease. It's an absolute triple net lease. So it basically looks and feels just like ownership does. I would say, those are the best candidates when the property is so critical to the business.

[00:07:55] Ronald Skelton: Okay. So what if the, like a lot of the people that I'm, that are listening to the show, they're acquisition entrepreneurs. A lot of them aren't operators coming from one industry looking to buy their business and stick with it for 30 years. They're true acquisition entrepreneurs. They're gonna buy something and prove it for three to five years. Maybe add things to it, bolt it on, and then, most of the guys are operating at that small medium business. The SBA loan range, 5 million. Maybe for this show, people go up to 10. They're playing right under the radar of private equity. So depending on the history of that radar goes, as low as 10 million in some industries. As low as 25, 30 million and some as high as 50 million in others before private equity will even touch it.

[00:08:37] So these guys are, their goal is to buy it below the radar of private equity, clean it up, do what they need to do, and sell it to private equity because it sells at a higher multiple. And that case, when you know you're gonna sell the business in say, five years. Is a sales leaseback gonna hurt the sellability of the business? Or is it gonna hurt the ability for you to help get the loan if the person just knows, cuz the new buyer has to live to that lease too. So I'm just curious, how does that impact the long-term game of an acquisition entrepreneur? Somebody who's going to not flip businesses, but, go in and do what their sweet spot is, right? Which is, improve revenue to a certain point and then sell for a profit. 

[00:09:16] Chelsea Mandel: Yeah, no, it's a great question. I mean, that's probably the most important, consideration when we're negotiating these lease agreements is what is change of control assignment? What does that look like? And I would say the opposite is true.

[00:09:26] Actually selling the real estate through a sale leaseback before you sell the business is typically the better move. Not only because you're bifurcating the cash flows into, EBITDA and rent, again at a higher multiple for that rent side of the equation. But because most sponsors, most private equity firms don't wanna own real estate or they can't own real estate. A lot of them have, a mandate that they can't own property. Or owning the property and paying for the real estate through that transaction doesn't get them to the return threshold that they need for the broader m and a deal. 

[00:09:56] And so a lot of the time we're actually working with either business owners or sponsors right before they exit, taking care of the real estate for them in a sale leaseback, so that when they sell the business or selling it clean with a long-term lease attached to it. Obviously the considerations that we have to take into account are making sure that we're structuring that lease to optimize the exit optionality for the next buyer. So we're setting rents at market. Escalators at market. We're not, trying to juice proceeds by pushing rents, above market. Cuz then buyers are just gonna ding your EBITDA. But we're also negotiating, operational flexibility for the business.

[00:10:31] We're thinking about change of control. Provisions, making sure that they can sell, the business without needing landlord consent and putting in flexible language as it relates to, expansions, alterations, other things that affect the operations of the company. 

[00:10:45] Ronald Skelton: Okay. And then, I'm thinking like, what is the other big concern is on these sales lease back, is rental increases. Is it done off a percentage above of inflation? I know they're done and you're actually, they're contracted in. How do they, can that be structured in any such way? Or is there common ways that the, the lease, is managed as far as the amount? 

[00:11:06] Chelsea Mandel: Yeah. So typically, if this were like a year and a half ago, I would say market standard is 2%, annual fixed escalators. Now, honestly, just given inflation and, broader kind of macro volatility, that's really moved to, I would say, two and a half to even 3% in some markets. Obviously, in better markets, if you're in, Los Angeles. Like it could be more like four, four and a half percent. So it's not, it's not fair to say there's one number for the whole, world.

[00:11:29] But really it is, I would say across the US you're probably at somewhere between two to 3%. You can do deals where there's like an inflation linked escalator where it's some percentage of CPI. But typically if you do that, there's a cap and a floor. So a lot of the European sale leasebacks that we do are basically, CPI for that country escalators with a cap of say, 1% or a floor of say 1% and a cap of, like 4%. So it kind of ranges depending on the country, but I would say in the US you're typically two to 3% fixed. 

[00:11:59] Ronald Skelton: So that's, a great segway to another question. Where can you do these deals? Because we do have listeners and I'm connected to a pretty big network in Europe. And I've got a lot of people I know in Canada,Australia. So, basically I, if I picked a top five or four or five, it would be US, then Europe, then Canada probably, and then Australia. 

[00:12:19] Chelsea Mandel: Got it. Yeah. So in terms of sale leasebacks, I would say US, Canada, Mexico, so really across North America and then UK and Europe. I know there is a sale leaseback market in Australia. I think it's just something that we haven't tapped into yet, um, but yeah, I would say North America and Europe, UK for us. 

[00:12:35] Ronald Skelton: Okay. I was just curious cuz like we're gonna have, as soon as I post this out there, I'll have people from different groups be like, Hey, can they do that in Europe? And I always thought about is that, there's this thing we call, the deal pie or the, the structuring of how we're gonna pay for the deal. I've always thought it about on the buy side, right? Like, okay, I've got x number of dollars down. I've convinced the owner that like I can give him a bigger check, within the first 90 days of operation. Then now I've got the sales leaseback. I can buy, secure the property, sales leaseback. I give him, pay him down or pay him off depending on the sales leaseback. I have people that are trying to do back to back closes, like basically close the sales leaseback at the same day they closed the business.

[00:13:13] It's possible. There's just a little extra legwork to do, right?

[00:13:16] Chelsea Mandel: That's about half of our business. Honestly, about 50% of our volume is simultaneous, sale leasebacks with m and a transactions. It's definitely become more popular in like the last year or two where acquisition financing on the debt, traditional debt markets has become more challenging.

[00:13:31] But when we talk to groups and for the first time they've heard of it and they've never heard of it before, it's like, like they can't believe that's like even a possibility. We've done so many deals in this space where I think until the closing day still, like our clients didn't trust that this was gonna happen. And then once we get one in with that group, it's like they just wanna continue buying and showing us opportunities to see if that could, be a fit for the sale leaseback to be acquisition financing. 

[00:13:54] Ronald Skelton: Awesome. So what are the criteria? Like what should somebody expect? I heard you say the valid video of the business, the balance sheet and stuff.

[00:14:03] So I'm assuming clean financials. A lot of these small businesses, they just don't have clean financial. If somebody comes to you and they bring a deal, what is, cause I've, for full disclosure everybody, you and I have been chatting for a while and I've been putting referrals over to you for a little bit and, a couple of 'em just, they didn't match cuz they were weird, like three or four tenants already in the building or that type of stuff.

[00:14:21] Chelsea Mandel: So in terms of criteria, like for that one specifically, that was a multi-tenant deal. So really, that's a good segway into the criteria, which is single tenant. That has to be the first criteria because the strategy is really, again, a credit strategy. So if you're looking at five or six tenants for the sale leaseback investor, they don't wanna be underwriting five or six credits and balance sheets and financial statements. They want one tenant, again, who the property is mission critical to those operations. 

[00:14:45] So if you have five tenants, you can't really say that, or it's harder to make that work because that has to be true across, five different situations. So we say single tenant in terms of the nature of the building, the occupancy, freestanding, we can do condo deals, but they're just more challenging and they come with a higher cost of capital. And that's really it from like the standpoint of the physical real estate. In terms of the asset class, again, it's any asset class, so long as this is operationally critical to the business. 

[00:15:11] So it could be restaurants, healthcare facilities, medical offices, industrial facilities, manufacturing, distribution centers, warehouses, anything where the business operates there. And it would be difficult for them to just pick up and leave or interruptive to them if they just had a close that down. So that's really a good way to think about, the actual real estate or the asset type. In terms of the non real estate kind of requirements or criteria, yes, we need to look at financials at the operating company. No, they don't need to be, audited or even like management or CPA reviewed.

[00:15:42] A lot of the time we're getting QuickBooks files from these smaller business owners, and that's totally fine. There will be more questions, but we can use QuickBooks, Excel file, PDF file, financial statements. They don't have to be anything super fancy. That's really it on the financial side. So I would say about three years of whatever those financials look like, PNLs, balance sheets, et cetera. And then for a simultaneous m and a deal, we wanna see what the proforma cap stack looks like. proforma balance sheet, what the sources and uses are for the deal. And that doesn't mean that, A is good and B is bad.

[00:16:14] You could be putting in no equity and we could still find a way forward, to make the sale leaseback happen. We just need to understand what that all looks like. What the cap stack, looks like, and what the sale leaseback is gonna be, vis-a-vis the, the broader cap stack. So that's really it on the, operations side. And on the real estate side, the last piece is really, if this is a piece of real estate that's part of a broader footprint. We also wanna understand like the site level contribution. So if this is something like, car wash, we wanna understand the four wall, criteria or metrics as well.

[00:16:45] So we'll look at the unit level, revenues, EBITDA to make sure that, from a health ratio standpoint, so rent to sales and from a coverage standpoint, EBITDA to rent, we also feel good about that specific location, not just the broader, credit of the consolidated platform. 

[00:17:02] Ronald Skelton: So what a lot of people don't understand is some of the big guys have been doing this for a long time.

[00:17:05] CVS pharmacies were all built off of this, right? Almost every single CVS pharmacy happens where they'll pick a location, they'll buy the location. And this is going back to my MBA days. So this is, my knowledge is probably based around 2007. I'm maybe doing something different now. So if I'm doing something different and they're doing something different now, and I'm misleading anybody, just correct me if you know the difference. But, based off of what I remember, they bought the land, they built the CVS and they would sell leaseback at the re-capitalize, basically get their capital bill the next month.

[00:17:36] And, a lot of places like that, I know, like quick trips are fairly common in, they're based outta Oklahoma. They're common in Oklahoma and Texas are big gas stations. They did that. I know, I have friends who were private lenders to me in the real estate space that would, do a sales leaseback. They would be the buyer of a QuickTrip or they'd build it for 'em. Basically the QuickTrip would go to 'em. 

[00:17:55] Chelsea Mandel: Yeah. Build to super dancing is really more common with the CVS space. So yeah, it's either sale leasebacks or build to suits. But what they figured out is owning real estate is a bad use of capital when you can invest your capital at, higher ROIs into the operating company. And that's why they do this. You're not in the landlord game. You're not a real estate investor. So let the landlords be the real estate investors and you do what you're best at. 

[00:18:15] Ronald Skelton: Yeah. So, like QuickTrip was doing the thing where like if you had, I think it was like three and a half million dollars. You'd buy the site, build it out, and they would just, do a built it.

[00:18:22] Chelsea Mandel: They would just sign a lease. 

[00:18:23] Ronald Skelton: Yeah, yeah. But so this has been done on the big scale. I mean, that's the indicator I always look for things. What are the private equity guys doing? What are the big guys doing that we should take a look at and figure out if we can make that happen down at our level?

[00:18:36] Because, for two reasons. One is we're gonna sell to them at some point. That's the end game, right? None of us are gonna be in business forever. One of the reasons we're trying to get the word out about buying business and stuff like that, cause, there's just too few of businesses that have succession plans and know what happens next. A lot of businesses out there, we're gonna run into a big problem in the economy cuz businesses are setting out there and we've got operators that are, 60, 70 years old and they don't have a succession plan. We don't, as an acquisition entrepreneur, you're not that person.

[00:19:02] You're really looking at what's the long-term play here. I have a holding company of, web stuff and stuff like that. I'll hold it until I get, older, bored and at some point. But I know there's an exit there, so I gotta run it that way. So inside of that, the sales leaseback is one of the things that we could, has been brought down from, the big guys been doing it for a long time, right? And then I didn't even know anything about it until I got into this space and somebody mentioned, Hey, does anybody know about a sales leaseback? I was like, what is that? When they said it, it's like, okay, I can make that happen. I know people that, or could have connections to the family offices and REITs and stuff to buy these real estate.

[00:19:38] So I started reaching around trying to build a little bit of my team so I could, help facilitate these for people who needed them. And, it went okay. And then, I kind of laid off of it because they were harder to, close than what I would kind of, initially expected and I got distracted. And then I had a couple people reach out to me again when I started this. I know a guy, that's how I found you. 

[00:19:57] But other than that, it was not like a choice to go, to you or somebody else because there's anything wrong there. It's just, this is all you do, right? 

[00:20:06] Chelsea Mandel: It's a very, very neat space. You really need, you need to have an expert advisor, not only in real estate but in sale leasebacks because of everything you said.

[00:20:14] You're, most of the groups were looking. At these deals with, or that we're currently working on, they're looking to exit to private equity. They're looking to exit to somebody. So we can't be in a situation where we structure a deal and we screw up your exit because you have to get landlord consent to sell your company or something else. That's just crazy and makes no sense. But someone structured it that way, who didn't have that sale leaseback expertise to know that your exit flexibility and optionality is really the most important thing to this business. 

[00:20:41] We've taken over so many deals from groups that were going elsewhere to even like the big one-stop shop real estate brokerage firms where they do a little bit of this, a little bit of that, a little bit of sale leasebacks, but not really. Or with big public, credit companies, not with middle market credit companies, not with private equity owned companies, not with SMBs that are gonna sell to private equity. So really understanding the exit, optionality for these businesses and structuring those leases, which are long term. They're gonna have to live with these for 15, 20 years. That's probably the most important thing that we do in these deals. So you really need to have an expert advisor who's in this space, in this lane, in this very small niche, cuz that's all we do.

[00:21:20] And thankfully, and I'm knocking on wood as we say this, but we haven't gotten anything wrong, where a deal has come back to bite us years later because we, structured a bad lease. 

[00:21:28] Ronald Skelton: So you opened my eyes to something because,I've run into some, I call 'em operators, business owners. Business owner to me is somebody who, or, a good business owner to me is somebody who's ready to exit. There's somebody else running it.

[00:21:39] They've already done all everything, it's prepared to go. But an operator is somebody, he's still in the mix of things. And, one of the things I, a lot of times they're wearing four or five hats. They don't have the money to bring in the right team to, make it a business owner situation where he is not just an operator. And I think that opened my eyes. What you're saying right now is, this is a good extra strategy too. So if you're a business, operator,you own a heat and air, company or something out there. You've got a big, manufacturing company. You're there every day.

[00:22:11] You need to replace your management. You need to bring people in. Like, you're running good. You got good profit margins, but not enough to hire a team at three or four. This is a great opportunity. Do a sales leaseback. Now you got operating cash. Bring in that team. Bring in an advisor to help you build that team and prepare it to exit. I mean, I know too many, situations over the last two or three years were like, look, you're just not really ready to sell unless you can find somebody who wants to be in this job every single day. You've gotta sell to an operator. So if you're an operator in a business, one of the things you tie your hand, you handcuff yourself to is, you're either gonna be stuck there for, an earn out afterwards while there's a huge transition.

[00:22:47] Or you're, gonna have to find an operator that wants to buy it, right? Somebody can just step in and do your daily task. And when you ask 'em like, why don't you spend a year or so, bring in a team and if you're offering, a lot of the manufacturing companies, they're operating at a 5% or less, profit margin. It's lean. Or, maybe a little higher than that, but you start talking about, I need to bring in a CEO and a top sales guy and an accountant. Cuz I do all the sales, all the leadership, and I do the books half the time. You start replacing three salaries and all of a sudden that five or 8% profit margin is tough. 

[00:23:22] I didn't think about it until you just said that. I think this is a great opportunity. Like, look, you've sitting on a million and a half dollars or two millions or $3 million worth of real estate. Maybe more depending on, if you're in LA that's the corner. But you're sitting on enough capital on that real estate potentially to take some skin off the table. Maybe even like, fund your retirement a little bit and still have enough money to bring in that operator, bring in that staff, bring in a company that's an exit advisor to help you prepare that, get it ready.

[00:23:49] And then now you've maximized, you got a little bit of money for now, and then you maximize your exit and you're selling something people really want. 

[00:23:57] Chelsea Mandel: Yeah. I mean there's a ton of great uses, I think for sale leaseback proceeds. I think the thing is people just don't think of this as in the mainstream or in the SMB world. Like they don't think of it as an obvious tool. They think of it still with like the view from like decades ago that like, oh, this is only for distressed businesses that need to like tap into liquidity. No, if it's, you need to buy equipment, use the sale leaseback proceeds to go fund equipment. That's ROI generating.

[00:24:22] Get another production line in there. Use it to professionalize, your management team so you can prepare the business for an exit. Use it to retire your, other generation above you of, parents that wanna get outta the business, take some chips off the table. There's all these different reasons. It's really just an inflow of cash for whatever you need or want the cash to be used for. There's nothing in our agreements that says you have to put the cash into the business or use it to pay down debt or do something else. This is really, if you're the business owner and the real estate owner, it's cash that you can use the cash for whatever you want.

[00:24:55] Ronald Skelton: Yeah. There's a societal,society based mindset that renters or low income renters are, or losers, right? They comes from the residential side of it. So everybody's like, well, I gotta own my building, right? It's more business, it's smarter for me to own the business and I'm not paying rent. And I was like, no, rent's actually a deductible expense, right? Like, you can write that off. As opposed to, I guess there's depreciation and other stuff on the real estate, but, there's some real advantages of not owning. 

[00:25:21] Chelsea Mandel: Totally. And a lot of the time too, like the sale leaseback candidates, the real estate that we're doing these, transactions around, they're pretty tertiary located. They're really not appreciating the way, if you took your sale leaseback real estate, did a sale leaseback, took the cash and bought, sick home in Malibu.

[00:25:38] Sure, yeah. Like, poo poo the renters and. hurrah the homeowners, but your's gonna appreciate. But your manufacturing facility in the middle of nowhere Iowa, probably is not gonna appreciate. So you're better off taking that rent expense tax deduction, than hanging onto your property thinking it's gonna, sell for multiples more than you paid for it now in a couple years, cuz it's probably not.

[00:26:00] Ronald Skelton: Right. So, let's walk through the process. What does somebody need to have ready to bring to you? What do you, I bring somebody to you and say, Hey, I've got a guy over here. He's gonna do a sales leaseback. He's about to exit. He owns a real estate and he was considering or renting it.

[00:26:15] Like a lot of these guys, they consider renting the property to the person who, is buying the business themselves. And while that works to some extent, I think it's better to do what you're doing there and you actually get the, you get a lump sum of cash and you're no longer, most of these business owners are not property managers, right? 

[00:26:36] Chelsea Mandel: Yeah. We've had some really funny stories actually about that situation that you're just describing being a really bad outcome for the business. Because if you are, say you're a food manufacturer, just for an example, right? And you've built this business and family owned for generations.

[00:26:51] You then sell your business, but you retain the real estate structure, a lease with the new private equity, acquirer of your business, Chelsea's salsa, whatever it is. Now, Chelsea's still owned your building. Chelsea thinks she's still in the business. Even though Chelsea's out of the business. Now I'm walking around the property thinking I'm still involved and it's just, it's awkward. One, we've had this situation where we've had to like remove, retell the landlord like this is an absolutely triple not lease. You're not in the business anymore. You have to just like kind of back off of it because they kind of still think that they're involved, even though they've sold the company.

[00:27:24] Retaining that real estate makes them feel like they're still, up in your business. And it's been a situation where we've gotten involved, I think two times, where we've had to remove that landlord. Help them actually sell the property to a professional real estate investor, because it just, it wasn't working out with the new owners of the operating business. Because you're, a lot of these owners also, like, they do want a clean exit. They wanna wash their hands of everything and not have to deal with the real estate or the business going forward. A lot of the time it's actually from the acquirers. They think, oh, I can't own the real estate, so I need the business owner or the seller to hold onto the property. Because they don't know about a sale leaseback.

[00:27:59] They don't know that they could bring in somebody else to buy the property. They just know that they can't own it. So that's where we're here to come in and say, look, your seller doesn't wanna own the property either. Let us bring in a total third party professional real estate investor. This is what they do for a living. They're gonna own your building. It's gonna be absolutely triple net. You're gonna make any spread also, if they're spread between the seller's pricing expectations on the building. And what we can generate in the sale leaseback, and neither of you have to worry about the real estate going forward. 

[00:28:25] Ronald Skelton: Yeah. I've got one from the, I don't remember. This is from back when I was planning on Clubhouse or if it was from, I host twice a month. I host a meetup for acquisition entrepreneurs where we get in and the goal is introduce ourselves to each other and kind of say where we're at in the game. And if we are stuck anywhere, like we help each other for about an hour and a half move.

[00:28:43] Like, find resources, make referrals, move your game forward. I think it was on Clubhouse, we were chatting about sales leasebacks and one of the guys, oh, that's a horrible idea. I was like, why is that? From the buyer's perspective, this guy bought a business. It was a, they repaired semis of all weird things. The funny thing is we had just one, me and a business partner looked at something similar. So I was really interested in his story. But he bought it and he rented the land back from, and the facility back from the owner cuz the owner didn't wanna sell him the real estate and he kind of didn't wanna be in the real estate game anyway.

[00:29:11] So he did a, triple net lease and, which was set up wrong from what I understand cuz the owner selling the business was not a real estate person either. So the lease was kind of funky. But, he needed to expand, he needed new bays. The thing was sitting in a five and a half acres. And a lot of it was just like yard, gravel, yard semis would go park out in this, maybe more like five and a half acres, but something, it was big, it was a big yard. So they'd park semis out and then they would bring them in to work on it. And he wanted to build two more bays on the building. 

[00:29:41] And the previous owner's like, well, you're not ready to expand yet. Where I'm not gonna allow you to build a, like, you're making a bad business decision. It was in the middle of this business, like this guy's business and saying, well, you can't, there's not enough business around town for to have a two base. He brought his 40 years of bias into what the market used to be, to the game. It was stopping this guy from expanding what he'd bought as a business because he didn't think it was a great idea. And that happens, right? If you're a buyer of the business and you're, the business, you're buying the, the seller wants to be your landlord. 

[00:30:14] Think about that stuff. Is he gonna, wanna play an active role in there when it comes time to, you need to expand the building, or add a, add another little office off to the side, or do something on the land that you're running. It's important you have to be able to have that ability to expand. 

[00:30:29] Chelsea Mandel: Yeah. The other thing, like, a pretty, relevant topic to what you're saying now is we're actually working on a deal where, a business owner, so sorry. A business is owned by a private equity firm. The private equity firm acquired the business from, you know, the founder.

[00:30:45] Now the founder, again, like you're saying, wanted to hold onto the real estate. So they structured a lease with the operating company. It's a fair, it's a market lease. It's fine. So we looked at and we said, okay, yeah, that lease is fine. We tried to push them to do a sale leaseback to bring in a professional investor. We'd pay them the same, amount that the seller wanted. They just didn't want to, they thought it'd be easier to just structure a lease with the seller. Now, this is a couple years ago. Now today, they've come to us and they said, we need to expand. We don't wanna fund it.

[00:31:13] The landlord doesn't wanna fund it. So now we're coming back to, it's a sizeable, industrial property. And they said, can we structure a transaction where you bring in a sale leaseback investor to buy the building? And then also pre-commit to fund our expansion. Which is about the same amount as what the building is worth. So say it's a $10 million sale leaseback, another $10 million for the expansion, that's a $20 million deal. This landlord, he doesn't wanna fund your $10 million expansion. Even if he's making a rate of return on it. He also probably doesn't have the $10 million to fund. He's not a professional investor. He sold his business.

[00:31:47] He's a great, business owner clearly, but he's not in the, investment, game of funding, additional kind of deals and expansions as they come up. So now we're working on a deal where it's kind of like this tri-party arrangement where we're bringing in a new sale leaseback investor to buy the existing building from the landlord. Structure a new lease with the operating company to really maximize it to justify the sale leaseback investors price that they're paying and they're committing to fund it a hundred percent of the total cost. And then structuring in, a lease amendment to increase the rent for that, yield on cost based on the total cost.

[00:32:22] They could have done this so much easier if we just did a sale leaseback initially, and then went to that investor and said, Hey, we need a fund, $10 million expansion. Okay, we'll do it at an 8% cap rate. We'll amend their lease and we'll increase the rent. Cause that's what they do as being a professional investor. They're always looking to fund these expansions. It also helps them as, the credit of the actual operating business grows because now they have more capacity on site, et cetera. So very relevant. 

[00:32:46] Ronald Skelton: Yeah. And the, the other one I heard was, and this is irrelevant to this too. Business buyer acquisition entrepreneur buys a business years ago. 

[00:32:55] He bought it. The seller leased the land to him. Things had happened. I don't know what happened. The conversation, it sounds like the seller of the business really thought, this was a safe pair of hands. This guy was gonna be operator for 20 or 30 years. He got an offer he couldn't refuse buy private equity. 

[00:33:10] It was a weird deal where private equity was funding a strategic purchase. So it was going to go to a kind of a competitor. And the landlord, now, the guy who's, he's not in the business somewhere. He sold this business 5, 6, 7 years ago, is trying to stop the transaction. He's not gonna lease that facility to this new buyer because he doesn't wanna sell the, he knows the competitor's gonna get it at the end.

[00:33:29] And he's like, no, those guys aren't getting my business. I sold it to you. 

[00:33:33] Chelsea Mandel: Yeah, it's a change of control issue. Like they're a change of control provision in the lease is not good because if it weren't good, it would say if you're selling all substantially, all the equity or the assets of the company, you don't need your landlord's consent to do that.

[00:33:45] Ronald Skelton: He told me about the lease to use it. It sounded more like a residential lease than it was anything. It was like, it was just basically a one pager that said, we pay for, x number of dollars a month, rent can be increased by a certain percentage, every, I think it was every three years even. And, we're responsible for all maintenance and repairs. It was basically like this guy had it drawn up on a single sheet of paper. I use the longer one for my residential rentals. 

[00:34:07] Chelsea Mandel: Are like 60 pages. It's, you spend the money now. hire an advisor like us. Hire professional attorneys in real estate, law and you will not regret it 15 or 20 years from now. These are long agreements and people can be shortsighted, unfortunately. 

[00:34:21] Ronald Skelton: This was a referral one. I told you people, I got a guy, my little campaign. This guy reached out to me and said, you know what attorney that can help me straighten this out cause I'm gonna probably have to bring an attorney in.

[00:34:29] I was like, yeah, you're gonna have to bring an attorney in and theoretically that if you did your paperwork right, that. 

[00:34:35] Chelsea Mandel: It wouldn't be an issue to begin with. 

[00:34:36] Ronald Skelton: Right? It wouldn't be an issue to deal with in the long term. But right now you,an attorney's the only thing that's gonna solve this, right?

[00:34:43] Chelsea Mandel: Yeah. And they have no leverage. I mean, if the landlord doesn't wanna approve it, and he, I'm, hopefully there's some reasonableness language in there and an attorney can get involved to get their hands dirty. But, you don't wanna be in that situation. You wanna do it right the first time.

[00:34:56] Ronald Skelton: Yeah. So, I bring a deal to you. What's the timeline look like? What are we looking at? Like what kind of lead time do you need to and what, let's do lead time. Like what is the timeframe and when in the deal, like I got an LOI. I know I want to close and I think I'm gonna need the money from the sales leaseback to fund this transaction.

[00:35:15] Kind of gimme the timeline of where you fit in there. When should you be introduced to the whole transaction? 

[00:35:20] Chelsea Mandel: Well, sooner the better. Always. Just regardless. I would say most of the time, the way the process really works is a sponsor or a searcher is looking at a business.

[00:35:28] They see that it has a real estate component. Pretty typically before LOI. They're sending us, some high level information on the building, address, square footage, acreage, et cetera. Some high level financial information on the operating company. Ideally three years of P and Ls. What their source and use is gonna look like. And then we'll come back to them, usually within a day or two with our sale leaseback proposal. That'll include our valuation, lease terms, proceeds, timeline, who the likely buyer universe is, et cetera. And then from there, we're usually just tracking the deal to see if they actually end up getting it signed up, if they end up moving forward.

[00:36:01] And then process wise, as soon as that acquirer has the business under exclusivity, that's when we would actually go out to our investors and start bringing in LOIs. And so from a timing standpoint, you can do that at any point on, at which you'd like. Obviously having typically the sale leaseback valuation and the lease terms, knowing what that looks like usually can make you a more competitive bidder. Maybe you can pay more because there's some spread, from the real estate. Or maybe you can offer a holistic package for the seller by being able to take into account the sale leaseback. So most of the time groups are coming to us early, like pre LOI because the sale leaseback can impact, what they're able to bid.

[00:36:38] So that's the first point. The second point in terms of, the actual transaction timeline. We've closed deals in as quick as 28 days. I would say that's very quick. We'd prefer to have, something more like 60 days. 90 days would be great. It depends on the size of the deal. And it's sort of counterintuitive, but larger deals are actually easier to close than smaller deals because larger deals, if they're institutional, we could go to the REITs, the funds, family offices, professional real estate investors. Versus smaller deals, we're looking at private buyers, high net worth individuals, local people who just wanna own property and it's much more complicated to find them and then also to negotiate and close with them. So it depends on the timeline. It also depends on, obviously what the acquirers transaction timeline for the underlying business deal looks like. And we'll always work to, to fit into that. 

[00:37:26] Ronald Skelton: Awesome. Define smaller deal and bigger deal in brackets?

[00:37:32] Chelsea Mandel: I would say if we're like sub 3 million, you're probably looking at private buyer, local buyer type deal. Above that, typically that's when the institutions will get involved. It depends on the location though. For some better locations, better real estate markets, maybe we can go smaller on institutions because they just, they have a preference for that market. 

[00:37:51] Ronald Skelton: Right. And that's in real estate value?

[00:37:54] Chelsea Mandel: Correct. 

[00:37:54] Ronald Skelton: Okay. Just making sure everybody knows that. So the second question is, sometimes the real estate's worth more than say the seller's, putting on it, you can get a premium through this sale leaseback.

[00:38:06] What disclosures have to be done to the seller of the business if you're doing back to back close? Cuz I'm gonna buy the business and then, sell the real estate. Does this, the seller of the real estate,in the real estate, in my residential real estate world, we call it an A, B C close, a back-to-back close.

[00:38:23] Chelsea Mandel: Yeah. Same thing here. Double escrow. Yeah. So you don't have to disclose anything to the seller. So the deals that we're doing, the seller thinks that the acquirer of the business is just buying the real estate, and obviously we're setting up that sale lease back to be just like you A, B, B, C, to be back to back closing simultaneous with the acquisition of the operating company. 

[00:38:42] The seller, the underlying seller, does not know about the sale leaseback. They obviously know that the real estate is being traded, but they think it's ultimately being acquired by, the business acquirer who's then, simultaneously selling it off. So they don't know about the spread in pricing. If the seller is selling the real estate to the, acquirer of the business for 3 million, and then the acquire of the business is selling it to the sale leaseback buyer at five, the acquire of the business is taking that, what did I say? So 2 million spread and nobody knows, on either side.

[00:39:13] Ronald Skelton: Does there need be, need to be any type of capital reserve, any type of, like money sitting somewhere? There's a money paid out front beforehand. Like you just mentioned earlier, you got earlier that somebody can bring you on early on in the stage. You guys charge for that service? Is that something you do for free? Or how does that work? 

[00:39:30] Chelsea Mandel: So everything that we do is a hundred percent success based. So we're compensated when we close a deal. So we don't charge for anything upfront. There's no retainer, there's nothing like that. It's just a percentage of the total sale leaseback value, and that percentage will vary based on the size of the deal.

[00:39:45] Ronald Skelton: Okay. And then the, like the reserves. Is that like, too bad you guys don't do anything in, like Switzerland or something. She probably already know what. 

[00:39:52] Chelsea Mandel: No, we do. We do. Yeah. Europe. 

[00:39:54] Ronald Skelton: I'll reach out to her. I know somebody, here's a scenario for you. I know somebody was buying a, furniture manufacturer and showroom and big, multi-million dollar.

[00:40:03] I think the real estate was probably a million and a half to 2 million. It was a small deal on your scale for the real estate. She was wanting to do a sales leaseback. She had people trying to help her do it. And basically, I don't know if it's just Switzerland Law or some, something came into the play where the seller had to be aware, the business seller had to be aware of it and, she knew that was gonna cause a, a deal because that real estate.

[00:40:28] Well, it had an emotional attachment to the original seller. So they built the business on land that had been in the family for 150 years. They were selling it to her cuz they liked her. She didn't have an emotional attachment to the real estate itself. This family actually owned like one block of that town. Like, once, over 150 years and they had sold pieces off over time. But, this is kind of one of the last pieces of the family legacy, and they just wanted to, there was an emotional tie to it. So she didn't want to have the sellers be aware that she needed that money to fund the, give them their check to buy the business.

[00:40:59] She was part of her acquisition strategy. And, I don't know the deal ever got,I won't say her name on here just because outta respect, I haven't asked her. But, and people in my network will know if I say Switzerland Furniture and I say her name, they'll find her. So I'll reach out to her and see if she's still got, if she still needs help with that. 

[00:41:15] Chelsea Mandel: I mean like in terms of disclosure, that may be a local nuance. Obviously we can look into it specifically. But typically, there's no disclosure. But the thing is, real estate sales are public. 

[00:41:24] So if you wanna go into, look into the records a couple months later, once a deed and everything is recorded and shows up and searches, a seller could. But most of the time they've sold their business by then. A couple months later, they don't care. They're not looking in to see, oh, did the acquirer make money above and beyond that price? We've never had that come up. And we've done so many of these simultaneous deals where it was very sensitive that the seller didn't find out. So that must be just like some local nuance or something, unique to the deal. 

[00:41:50] Ronald Skelton: The one I know that successfully went through, the real estate was actually more valuable than the business.

[00:41:55] Chelsea Mandel: Yeah, we've done a number of those deals. That's like, a lot of the time where the sponsor actually, we call it a sale leaseback free role, where they're not putting in any equity to acquire the business. It's because of, the real estate value being more than the business value. They can create spread above and beyond what the seller's looking for on the real estate side. And then roll that spread into funding, the acquisition of the operations. 

[00:42:15] Ronald Skelton: What did you call that something free roll?

[00:42:17] Chelsea Mandel: A sale leaseback free roll. 

[00:42:19] Ronald Skelton: I'm gonna use that as a title. We're gonna like, you know how to do a sales leaseback free roll. 

[00:42:23] Chelsea Mandel: Yeah. I really written an article called like, the Art of the Sale Leaseback free role. We're trying to coin the term here.

[00:42:29] Ronald Skelton: We'll tag that as part of our title. The Art of the Sales Back Free Role. That's a good one. Cuz you know, a lot of these guys teach this like, the, even the two. in full disclosure, I've taken courses from multiple people. Roland Fraser,Jeremy Harbour. I've studied, on the show and got materials from all kinds of people that I've interviewed.

[00:42:44] They just gave me their materials after I've interviewed them. And all of 'em say if you wanna do a zero down, there's this deal pie. And one of 'em is sell the real estate, right? So it is a very viable solution. I'm glad I found you. And now we have A team that can actually help do that. So I expect to do a lot of business, with my, I got a guy plan here, or I refer people to you and help them. That's one of the reasons I wanted to do the show. Like if I need to pre-screen people and kind of know what you're looking for so I don't send things that waste your time.

[00:43:10] I'm, a big thing on everybody's times valuable. You're listening to my show then, people out there listening to my show and you reach out to me. I'm gonna kind of do a little, I don't wanna refer to you somebody that's just gonna waste of your time and I don't wanna refer you to somebody, if it's not a good, relationship situation. So, that's kind of where I stand on. We'll just make sure we can do our best. I can't control everything, but if I can make sure everybody's taken care of in this situation, then I, that's the kind of referrals I like to do. And if I make a few bucks on the back end, that's awesome. Right? That's absolutely. 

[00:43:41] Chelsea Mandel: We pay referral fees all the time. It's a big piece of our business. Whether it's, m and a firms, attorneys, lenders, even, commercial bankers. We're deep in this space of, middle market, lower middle market smb, and we wanna reward everybody that's helping us, get deals done. 

[00:43:54] Ronald Skelton: Yep. That's cool. It's funny thing is I've got a, like, I always joke and say I have a real estate, buying addiction. But, I don't wanna own the commercial, I like the residential side because of the appreciation.

[00:44:04] On the commercial side, I would be interested in like really high cash flow. But I never even thought about that. Like if I bought a marina or something like that, that had a really high cash flow, I'd never thought about like doing a sales leaseback on that and just keeping the cash flow and not actually happen to be the, owner of the, the land. Right? I dunno if you would be in, if you guys are interested in like large marinas and. 

[00:44:25] Chelsea Mandel: If it comes down to the same criteria. We need to understand who's the guarantor, what do the financials look like, what do the site level economics look like? But yeah, we're actually looking at a marina deal right now.

[00:44:33] Ronald Skelton: Oh, cool. So, there's some high cash flow things. Like I always tell people, I'm not interested in a commercial listing. Oh, that's kind of a lie. Marinas, high-end, RV parks, not low end ones, but high-end RV parks for tiny home communities. Things where there's kinda a luxury. Some of these RV parks actually have luxury. What they call condo units on the outside, where it's like they're fenced in and stuff. I dunno if I had even told you this. This, the studio I'm in right now is mobile. 

[00:44:55] Chelsea Mandel: Oh really? No, I did not know that. 

[00:44:58] Ronald Skelton: This is a portable studio. It's actually made out of a Conex shipping container. So it's only 10 foot by 10 foot. And our main house now, we sold our primary house in five acres in Oklahoma last year.

[00:45:08] Our main house now is a, 320 square foot tiny home that we can pick up and take anywhere we want to go. So we kind of, we're in that that nomad lifestyle where we can, pack up and go wherever we want in the world. So what we get to experience when we find a location, until we find land to buy,we park at some of these RV parks and stuff. And, some of 'em are high end nice. Like there's only probably 20 units, 30 units in the one I'm in now. And I got redwood trees in my front yard. The owners are really cool. It's really laid back. 

[00:45:35] Chelsea Mandel: Totally different life from the life I live here in New York City. I also am in like 300 feet or so. No, I'm kidding.

[00:45:41] Ronald Skelton: Funny thing is like, you're in 300,jokingly, but you're in 500,000, 1500 square feet or whatever the number is and it's thousands per month. I paid cash for the tiny house. I paid cash for my office. I think our living expenses, insanely cheap. The lot rents for decent places here in California are under 1500.

[00:45:59] Maybe 1800. Some of the more popular areas where there's like, you're closer to town. And ours is significantly less than this, but it's really hard to get into this one. You have to you gotta catch a spot open and you have to like, apply and like talk to the owners and stuff. It's a different situation because they're really looking. It used to be a really rough place actually. They cleaned it up, so they're really careful of who they let back in. So, let's go back to how do people get ahold of you? Kind of what everybody like work with me cuz we, we got a thing going. 

[00:46:26] Uh, I think, just hang up my acquisitions and mergers hat and just go find deals for you. I like the real estate side. I think this is a brilliant way to do deals. Here's a good one before we wrap up. If somebody is out there looking for deals to do, what's a good way to indicate that, hey, this could be a decent sales leaseback. Not just that they own real estate, but are there any other qualifying factors that you would look at and go, Hey, if you're out there looking and you wanna do a zero down or low down,or save your down payment for operating expenses and growth, here's kind of what you need to look for businesses that own real estate.

[00:46:57] Chelsea Mandel: I mean, honestly, it's really just like own real estate, and obviously the financials have to be there. It doesn't have to be, a huge company. It just, it depends on the deal. So it's hard to say because, if it's a much smaller deal, the cash flows could be much smaller, but your coverage is still there.

[00:47:12] So I would say send us everything, we'll give you quick feedback on everything. I mean, everybody that's reached out through Twitter, I think for me, has gotten a response within 48 hours. So we're super responsive. If it's not a fit, we'll tell you quickly, we won't waste your time, we won't waste hours. But if it is a fit, it's pretty straightforward. The PNLs that we need, the proforma, sources and uses and then whatever you have on the real estate. But we have our own real estate database we can dig in as well. 

[00:47:34] Ronald Skelton: Cool. So, I always like to ask this. Real quick, if somebody could only remember two or three things from today's show, what would you have 'em to remember about sales leasebacks and about you in general?

[00:47:45] Chelsea Mandel: Yeah. I mean, real estate included. Look at that as an opportunity for sale leasebacks. I say that all the time cause I know in the m and a space that's, it's a buzz word. It's a key word and a lot of these opportunities that groups are looking at. And a lot of, acquirers are just shying away from those opportunities cuz they don't have a solution for the real estate.

[00:47:59] Let us be your solution for the real estate. And in terms of reaching out, you have my contact information. Again, we'll always give you quick feedback. We'll be very clear about the information that we need to see and we'll tell you if it could be a fit or not. 

[00:48:10] Ronald Skelton: Awesome. Awesome. And to wrap this up, what's one thing, you said you live in New York. So what's one thing about New York City that people don't know?

[00:48:20] Chelsea Mandel: Ooh, that's a good question. 

[00:48:21] Ronald Skelton: I've always wanted to go watch the ball drop, but I don't like big cities. I worked in San Francisco and I don't, for a long time there, not a long time, couple years. I don't see the appeal of it. The whole town smells like pee. There's violence and crime everywhere. My wife goes down there for dinner and stuff with her sister and like, you gotta beg me to go. Like, I won't go down there unless I have to. But yeah. Is New York.

[00:48:39] We have the best food. I think like, I just got off, a couple week trip in Europe and like I loved it. Everything about Italy, the food is amazing and Greece, but like we really have the better like cuisines of those countries here in New York City. Cool. Well I appreciate you being on the show today. I look forward to doing a lot of work with you and sending you people and, I think this is an awesome show. I think we did a great job. I think people learned a lot from this one. 

[00:49:03] Chelsea Mandel: Yeah. Well, thank you. It was great to be here and yes, I am confident, 100% confident that we're gonna find ways to work together. 

[00:49:09] Ronald Skelton: Awesome. We'll call that a show. Hang out for a few seconds.