Buy-and-leaseback arrangements are quite common among some of the industrial REITs. They buy a property and lease it back to the original seller for a no. of years. The advantages of this practice are it increases the distribution to shareholders, diversifies the sources of rental income and has the potential for capital gains when the property is eventually sold. However, there are risks involved in this practice.

While the property is a long-term asset often lasting 50 years or more, the lease agreement is a much shorter one that lasts between 3 to 7 years (with extensions at the options of the tenant). The thinking behind buy-and-leaseback arrangements is that the REIT would be able to find a tenant and maintain or increase the rental income for the intended holding period of the property. However, some of the industrial properties are highly customised ones. The pool of potential tenants would ...