Need Capital? Try Selling Your Branches and Leasing Them Back.

With origins over 3K years old, pawn shops are one of the oldest sources of credit and lending for consumers. In fact, during the Great Depression, pawn shops were one of the only ways for struggling families to get cash to make ends meet. They would often sell valuable heirlooms and family treasures, such as jewelry and formal silverware, to pawn shops in order to cover emergency expenses. Their hope was that once their financial situation improved, families could return to the pawn shops to buy back their cherished possessions.Some financial institutions, including California’s Sierra Bancorp, Indiana-based Finward Bancorp, and First Northwest Bankcorp in Washington, have come up with a similar option to help provide capital to their organization. They’re selling some of their branches to real estate companies, then leasing the same branches back from the purchasers. This sale-and-leaseback strategy provides them with the liquidity needed to restructure bond portfolios, offset losses, or invest in new opportunities, all while maintaining their presence and operations in the community.A Sale for a LeaseThis has become a growing, viable option to generate capital. Here are some recent examples of financial institutions that have taken advantage of this strategy to manage both their capital and their brick-and-mortar branches:

Leasebacks as a Source of CapitalRestructuring a bond portfolio is a popular use for the money acquired through selling and leasing back branches. Some financial institutions bought bonds when interest rates were much lower, only to find the bond value evaporate as rates rose in 2022. Selling off those lower-rate bonds and buying new debt that pays more means selling at a net loss — a loss that leasebacks can help cover.That’s just one use that a community financial institution (CFI) might make of the equity trapped in real estate holdings. It could also use the cash to deal with other concerns, such as offsetting commercial real estate (CRE) losses, acquiring another CFI, or tackling any other project that additional capital might make possible.Once a management team has accepted the possibility of raising funds by selling real estate, “it’s purely a question of what’s my cheapest source of capital,” says Tyler Swann, Managing Director for investments at New York-based W.P. Carey. “Is it to have capital tied up in my real estate, or can I take the money and redeploy it more efficiently in my business?”According to Swann, rising rates are a key indicator that it’s time to reassess your CFI’s capital sources. Consider Timing, Purpose, and Commitment

The downsides to a leaseback include timing and purpose. You only get to sell a branch once, so make sure that this is the time to sell it and that you have a solid purpose behind the decision. A CFI should also be certain that it is committed to staying in that branch for the term of the lease. A leaseback means that the organization loses the option of selling the branch and leaving the area, unless it can negotiate exiting the lease early. Limiting the number of branches a CFI sells can help protect the possibility of trimming branches in the future."You're doubling down on the communities that you're in when you do a sale leaseback," said Carl Streck, the CEO of MountainSeed. "It's counterintuitive, but it really is true."Selling your CFI’s branches and leasing them back can help free capital to restructure bond portfolios or pursue other projects. A CFI that’s interested in a leaseback should be sure that this is a good time to sell, have a solid project in mind for the capital, and be confident that it intends to stay in the sold branch for the leaseback’s term.