Saturday, June 20, 2015

Sale-Leaseback, A Hidden Treasure Chest?

American companies, including smaller, family-owned businesses and Corporate America, own an estimated $4.1 trillion of non-specialized "investable" real estate. Yet historical returns from equity investments have consistently exceeded those of real estate. As a general rule, any dollar that can be "monetized" or sourced from the sale of corporate real estate and reinvested in that company's listed or unlisted equity stock would create positive leverage.

That's why any business owner or CFO whose company owns real estate should review or consider a sale-leaseback transaction.

What is Sale-Leaseback?
Although used for more than 50 years, sale-leaseback transactions – and the benefits they can offer to corporate investors – are still not always fully understood.

In it simplest form, a sale-leaseback transaction entails the sale of corporate real estate and the simultaneous commitment to a long-term lease, generally 15 years or longer. This combination allows a company to redeploy the capital that had been invested in real estate into the core business.

Why is it worthwhile?
The biggest benefit of a sale-leaseback transaction is the ability to increase a company's financial flexibility by off-loading real estate at attractive long-term rates, while maintaining the availability of bank financing for a future date. By being both the lessee and the seller of the property, a corporation has greater bargaining power to ensure it maintains uninterrupted control of the facilities, including operations, maintenance and alterations, it negotiates the rights to assign and sublet the facilities, as well as enjoys lengthy initial and renewal terms.

What's the catch?
While sale-leaseback can be a worthwhile strategy for many companies, it is not without risk. Some of the risks to consider are:

Loss of residual property value
In most cases, the future value of any single-tenant property will be lower than today's sale price since real property generally depreciates over time. In the unlikely event that the residual value of the property increases over the primary lease term, the potential rental income from the property will increase as well. By negotiating a renewal option past the primary term at fixed rents, the seller/lessee can enjoy rental costs that are below market while still benefiting from greater potential sublease income.

Possible Relocation
At the end of a lease without any renewal options, a seller may be forced to either negotiate an extension at current market rents or relocate. To prevent such a situation in a sale-leaseback transaction, a company should consider employing a long-term (50-60 years) lease, thereby delaying the need to relocate or renegotiate until the asset will likely have become obsolete. When the term comes due, the buyer/lessor almost always would allow renewal of the lease, and on a worst case basis, at the same price the seller/lessee would pay for alternative space.

High Rental Payment
Rental payments under the lease cannot be adjusted without the consent of the lessor. As a result, if the rental market softens, a seller/lessee may be locked into a rate higher than the market rate. Yet, the company has protected itself from a decrease in property value and still enjoys the use of the capital. In addition, a decrease in rental rates represents a good opportunity to renegotiate the lease at a lower, modified rental rate for a new primary term.

Specific Accounting Principles
While the fundamental accounting principles of sale-leasebacks are relatively simple, following the generally accepted accounting principles (GAAP) provisions are critical. Failure to comply may result in the re-characterization of a sale-leaseback transaction as a mere financing vehicle, depriving the parties of the very benefits they have sought to achieve.

Can Sale-Leaseback Add Financial Value?

Will it strengthen company financials or enhance shareholder wealth? Can sale-leaseback pay down debt, reduce risks, increase working capital, or fund acquisitions by executing sale-leaseback?

Basic diagnosis can show financial impact analysis, blended cost of capital and other potential transaction terms/conditions, analysis of impacted balance sheet, efficiency, liquidity, & risk ratios,

To take further steps and diagnose your own opportunity click here

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