The Effect of Sale-Leaseback Transactions on Property Taxes

Only three months after opening its new Garden City location that includes an “iconic” eight story glass tower of cars clearly visible from the Meadowbrook Parkway, national used car vendor Carvana has listed its property for sale in a sale-leaseback offering. Carvana is selling its new Garden City location | Long Island Business News (libn.com)

In simple terms, sale-leaseback deals are a popular route for property owners to off-load assets and raise capital while retaining the right to operate out of their carefully chosen locations – usually under a 20 or 30-year net lease. Buyers find sale-leasebacks an attractive vehicle to enjoy an ostensibly steady return on capital based upon a long-term triple net lease with a credit-worthy tenant. The potential for a market value appreciation over the term of the lease is another upside for a buyer, although this needs to be carefully balanced against the risk of receiving worn-out obsolete improvements (i.e. a 30-year-old glass car tower) back at the end of the lease term. Despite these risks, the sale-leaseback market is booming across the country with record-breaking volume expected by the end of 2023. Sale Leaseback Volumes Break Record (prnewswire.com)

As stated above, a sale-leaseback transaction will normally leave the seller as a triple net lease tenant with an obligation to pay and right to challenge the property taxes.  In evaluating a property tax challenge, it is important to note that the actual terms (sale price and rent) of the sale-leaseback rarely impact a property tax challenge case since the complexity of the transaction often obscures any real evidence of “market value.” In fact, many Assessors view these types of transactions to be more of a finance instrument than a sale or lease.  Accordingly, seller/tenants in sale-leaseback transactions would be well-advised to put aside the terms of the transaction and consult with an experienced attorney to make sure that the market value used for property tax purposes over the term of their lease is correct.

Thank you to Will Meyer for this week’s Tax Tracker post.