Industrial sale & leaseback: the technical risk only the buyer needs to find

In a sale & leaseback, the seller has been in the asset for years. They know exactly what works and what does not. The buyer has three or four weeks of due diligence to find out.

This information asymmetry is the defining feature of the S&LB, and the risk most frequently underestimated in these transactions. Not because buyers lack sophistication, but because the structure of the deal creates incentives that favour the seller at the moment of technical diagnosis.

Why the S&LB carries a structural asymmetry

In a conventional sale, the seller wants the asset in good condition: it has been managed as an investment, and good technical condition defends the price.

In a S&LB the situation is different. The seller is the owner about to become the tenant. The asset has been managed as a user, not as an investor. Maintenance has followed operational criteria — keeping production running — not asset value criteria.

The usual result: deferred CAPEX accumulated over years. Installations that work but are at the end of their service life. Roofs with spot repairs that solved the immediate urgency but not the underlying problem. Technical systems that perform their function but do not meet current regulations. None of this stops the asset working today. All of it creates costs the buyer will carry tomorrow.

What the seller's report does not show

In many S&LB processes the seller provides a Vendor Technical Pack — a technical report commissioned by the seller — to speed up the process and build confidence. The Vendor Pack is useful, but it is not enough.

A report commissioned by the seller does not share the objective of one commissioned by the buyer. The Vendor Pack describes the asset. The independent TDD assesses the risk of buying it.

The difference is subtle but critical. A Vendor Pack states that the roof was repaired in 2021. An independent TDD analyses whether that repair was sufficient, whether areas remain at risk of water ingress, what the remaining service life is and what a full replacement would cost within the holding period. One informs. The other protects.

Technical risks specific to industrial S&LB

• Deferred CAPEX in process installations. Industrial ventilation, pressurised water, process transformers, waste treatment: usually under corrective, not preventive maintenance. Once the seller is no longer the owner, the incentive to invest disappears.
• Pending compliance upgrades. Industrial safety, fire protection, accessibility and energy efficiency regulations have evolved. Upgrades can become mandatory at short notice, at the next statutory inspection or upon any modification of the asset.
• Roof and structure with undocumented maintenance. An asset with a 25-year-old roof and no verifiable maintenance history is a risk the TDD must quantify.
• Electrical installations not compliant with current regulations. Many installations in older industrial buildings have never been reviewed against the current low-voltage electrical regulation. Non-compliance creates liability and upgrade costs.
• Unknown or very poor energy performance. Industrial assets often hold E, F or G energy ratings. Funds with an ESG mandate must estimate the improvement cost before adding the asset to the portfolio.

Timing of the TDD is critical

In a S&LB the TDD must be carried out before signing the purchase agreement and, if possible, before the final price is set. If the TDD identifies significant technical issues, the buyer needs room to negotiate. Once the contract is signed, the ability to renegotiate price or demand warranties drops sharply. A TDD that arrives late only documents the problem; it does not solve it.

What a buyer should do in a S&LB process

1. Request the Vendor Pack but do not let it replace your own TDD. It is a starting point, not a result.
2. Ask for access to all available technical documentation. What the seller cannot or will not provide is itself relevant information.
3. Include process installations in the TDD scope, not only the building's common services.
4. Translate the TDD into CAPEX with a schedule. How much to invest, in which line items and by when. Only then can it be used in negotiation.

A final thought

A well-structured S&LB makes sense for both parties: the seller releases capital, the buyer acquires an asset with a solid tenant and guaranteed income. But the strength of the tenant is not the strength of the asset. A ten-year lease with a top-tier tenant does not repair a failing roof or bring a fire protection system up to current standards.

An independent TDD in a S&LB is not bureaucracy. It is the only way to know exactly what is being bought — and at what real price.