Monetizing your Corporate Real Estate

by CoyDavidson on December 15, 2009

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Sale | Leaseback Transactions

In times of economic uncertainty, cash is a preferred asset because it can provide a hedge against the unknown and commercial real estate properties owned by operating companies are assets that can be converted into cash. Real estate sale leaseback financing is when a business sells its commercial property for current market value and then instantly leases it back from the purchaser. They sell it to gain built up equity which frees up capital which can be used to invest back into the business, reduce debt, enhance liquidity or fund acquisitions. In some cases, the option offers some potential tax benefits.

In today’s financial environment where the debt markets are very difficult to access, companies that may not be investment grade are finding it challenging and expensive to raise capital and may gain a significant economic advantage by doing sale/leasebacks to raise capital rather than going to the debt markets.

Is my company and property and candidate?

  • Long term, single tenant leased real estate assets are sought-after properties by investors and institutions.
  • Sale/leaseback transactions can be used for nearly any property type; office, industrial & retail.
  • Sale/leaseback transactions can typically be done in a relatively short time frame (60 to 180 days).

Structuring the Sale/leaseback

The state of the capital markets, the economy, and real estate market both  national and local, will affect the sales price but a company can do several things to capitalize on the asset’s value

  • Structure the lease term to be at least 10 years. A longer lease term typically enhances the value.
  • The lease rate should be at market and include modest increases, 2 percent to 3 percent per year. Above market rates will make financing the property for the purchaser difficult.
  • The lease should be triple net (NNN) with the tenant responsible for all operating expenses.
  • The tenant also may want to assume all capital expenses for longer leases, structure and roof, for example. This will increase the value of the property.
  • The seller should use a qualified and experienced corporate real estate advisor to assist in developing strategies, structuring the lease, determining value, identifying likely buyers, preparing the sales brochure, marketing the property and assisting in the transaction and closing process.

Completing a Sale/leaseback can provide the following financial advantages to the operating company:

  1. Real estate asset is converted into liquid asset (cash).
  2. Capital assets are removed from the balance sheet.
  3. Debt on the balance sheet that was associated with the real estate is removed.
  4. Debt equity ratios are improved.
  5. The lease shifts to the balance sheet as a footnote.
  6. The lease payments are tax deductible to the new tenant.

The majority of corporate America and even small business is not in the real estate business, and the extent to which a company can monetize its owned real estate and redeploy those assets, in theory, into higher return opportunities in their primary business makes good economic sense for many.

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