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Benefits of Sale-leaseback Transactions - YouTube
Channel: CRE Fast Five with Karly Iacono
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Welcome to CRE Fast Five, where we
detail hot topics in commercial real
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estate in five minutes or less. I'm Karly
Iacono and tonight we are talking
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about sale-leaseback transactions. Now
sale-leasebacks are nothing new but as
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the credit markets continue to tighten,
they are becoming an increasingly
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relevant option for business owners who
need to unlock maximum equity. We're
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going to run through what a sale-leaseback transaction is and go through some
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considerations and pros and cons from
both the owner/user perspective and also
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from the potential buyer or investor
standpoint. Let's jump in. First a
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sale-leaseback transaction is one in
which an owner/user sells off the real
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estate and immediately leases it back,
thereby becoming the tenant. Pretty basic.
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If it's the American dream to own
real estate, we always want to control
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our destiny, control our property, why
would a company want to do this? There
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are a lot of reasons. Let's go through
them now. The first is 100% financing.
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What I mean by that is if you were to go
to the bank and do a refi or get
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additional equity out of your current
property, you're probably looking at in
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today's market 50%-55% loan to value.
Maybe four months ago that
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was 60%-65% but nothing
close to what you can unlock by doing a
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sale-leaseback transaction. You are actually getting 100% of the value of your
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property that is currently tied up in an
illiquid form. The second is dramatically
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improving your balance sheet. You are
taking a long term non-liquid asset and
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converting it immediately to working
capital. You're also taking a liability,
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which is your mortgage, and converting
that to an operating lease which is an
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off-balance sheet transaction. The third
thing are the tax benefits. Now of course
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I'm not an accountant, I'm not a tax
adviser. But, how this works is your
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operating lease can be 100%
written off as an expense instead of
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partial deduction that you would get
from mortgage interests. Potentially
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huge tax savings there, just by
converting the structure. The fourth is
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maintaining control. Sale-leasebacks
are really designed to mirror ownership.
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You can structure this in any way
that works best for your business. If
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you wanted to have a 20 year base term
with another 50 years of options, that is
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a very long time horizon to control your
property and continue operating your
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business. Those are some benefits,
let's go through some considerations.
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The first is your rent level. Now it goes
without saying that the higher your rent,
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the higher your net operating income
that you're offering to an investor, the
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higher your proceeds are going to be.
However, be very mindful that this rent
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is actually sustainable. Most investors
will look at a rent to sales ratio.
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That varies by asset class as to what's
considered acceptable or safe but you
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know your business best from the owner/user perspective. Make sure that the
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rent is truly sustainable. You also need
to make sure that it is somewhat in line
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with market rents. Again, a savvy investor
is going to compare your rent and decide
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for themselves if number one your space
is re-leasable, should you ever leave, at
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current rates and two if they think your
business can sustain it. From both
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perspectives be very mindful of the rent
amount that you are offering. The second
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is a strength of your company. Now if
you're a local operator, maybe you have one
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location, maybe you have two, it's a
little more difficult to get interest
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from a sale-leaseback perspective. If
you're a multi-unit franchisee, maybe
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you're a mid-sized company, or you have
any sort of credit or strength behind
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you, there will be tremendous demand if
you do pursue a sale-leaseback.
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Be realistic about the strength of your
company. Also be realistic about how long
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you can truly sustain the commitment that you are signing up for
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under that new lease. Third is the length
of the lease. Now typically sale-leasebacks
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are going to be 15 years plus with the
most interest coming in the 20 to 25
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year base term range with options. Now
the options are at the tenants discretion.
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I would say if you are on the tenant
side, you want as many options as
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possible. Maybe 20-25 years of options, if
you can get them. You want to
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structure that base term to be as long
as you possibly can sustain it but not
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too long to where it feels oppressive.
The longer the lease terms, typically the
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higher the proceeds. What you're
probably starting to see is flexibility
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its inversely proportional to price or
proceeds on your deal. It really is
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about hitting that sweet spot to where
you don't feel that your business is to
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negatively impacted or to constrained
but you are still maximizing proceeds .
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Again, flexibility and proceeds typically
are inversely related. The third thing to
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think about is the condition of your
building. The more management you as a
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tenant are willing to take on, the
cleaner the lease structure, if you're
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absolute net that's the best possible,
again the higher your proceeds. If
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you have an older building, maybe you're
looking at a roof replacement in a few
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years you need to factor that in as that
is going to be on you as the tenant.
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If you're thinking about doing a double
net structure where you're shifting some
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of that onto the investor in terms of
the management and property maintenance,
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understand that your cap rate will then
be higher and your proceeds lower. Really
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being realistic about the age and
condition of your building is very
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important. The last thing is you want to
build in as much flexibility as the
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tenant, new tenant, that you possibly can.
I would really recommend considering a
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right of first refusal. If your new
buyer comes in and you complete your
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sale-leaseback transaction, everything's
great and maybe they go to sell in 3, 5
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10 years, whenever it is, it would be great to have an
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option to purchase back your real estate
should something in your circumstances
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change. Right of first refusal is very
important in your lease and then your
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options. Be mindful of the length of
options and how many that you have and
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the rent increases, actually both through
the base term and the options, that you're
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agreeing to. All of this is very
individualized, like I've been saying.
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If this is a structure that you think
might work for you or you'd like to
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explore further, please give us a call.
We're happy to talk through your
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specific situation. On the opposite side
of the coin if you are an investor
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contemplating a sale-leaseback purchase
this can be a great way to get an
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experienced operator under a long-term
lease and really get surety of income.
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Either side, give us a call and we'll talk
you through. That was CRE Fast Five. I'm
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Carly Iacono and I look forward to seeing
you again soon!
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