Re-Capitalize Your Enterprise with Sale-Leaseback



Is your enterprise seeking a recapitalization event? A sale-leaseback is a useful recapitalization tool for static uses of commercial property. The net proceeds of sale (equity + principal + capital appreciation) can be substantial. Before any sale-leaseback can occur, prepare a business case to justify the project; the terms of sale and lease are discussed to identify sale value, net proceeds, where to apply the cash and how the enterprise will benefit from the sale, currently and long-term. The sales-leaseback is attractive to seller and buyer in the early stages of economic expansion and during slow growth economies. Low, predictable rent increases benefit the tenant; investors benefit from a credit-worthy long-term investment. Facilities management can be outsourced to a property management firm, bringing efficiencies of services at low predictable costs. A consensus of yes among top management prompts strategic planning to plan a sale-leaseback project (“SLp”).

return on investmentXAction Spreadsheet

A sale-leaseback is a financing tool to re-capitalize an enterprise by exchanging property value and ownership for a long-term net lease; buyers are funded privately or publicly held. It works best with established enterprises (operating from a large single facility or from many sites with the same use), is a reliable loan for a lender, and is a reliable long-term investment for the buyer; the tool is akin to a corporate bond sold directly to one bondholder. I urge the preparation of a business case to justify making the commitment; facilities operating costs are assembled with accuracy. Most planning comes from a committee assembled by top management of the seller (CEO, COO, CFO, Chairman, board of directors if any). A commercial lease is often 10-15 years pending staff count and TI involved, yet the SLp uses 20+ year lease terms.  Results are compared to the costs to sell, a lease projection, property management expectations and the cost/benefit of tenancy vs. property ownership. The SLp taps equity, principal and capital appreciation by securing a large loan using the credit of the seller and the buyer to match stringent underwriting criteria of the lender; credit quality of the lease and buyer dictate the amount of the loan and equity required by the buyer. (Note: Equity investors of the buyers are attracted to the long-term reliability of income from each lease closed vs. buying an interest-bearing corporate bond.)


MIRR & NPV vs. IRR. What are the long-term projections of economic performance for the net proceeds of sale? Financial projections should include costs to finance equity and interest received from loans made by the company; MIRR (modified internal rate of return) shows the time value of your money more accurately over the term of the net lease. NPV shows the loss or profit from your investment assuming a discount rate. Compare MIRR to 10-year treasury yields and similar fixed investments. This cost-benefit analysis is included in the business case for the SLp.

Biz Meeting

Sale criteria. Investment sale brokers consistently conduct marketing to source seller candidates for SLp’s. Buyers often create a private equity fund (with return expectations and placement criteria), placed through a mix of direct marketing and relationships with investment sale brokers. Instead of reacting to a marketing call (you’re unprepared for), prepare the business case outlined above, assuming a capitalization event. Report results will clearly show the pro’s and cons of committing to a SLp, qualitatively, quantitatively, operationally and culturally. Begin with a broker’s appraisal of the property(ies) to be sold, factor the potential net rent paid by your company’s credit score, this produces market value of the property(ies). Net proceeds of sale are the amount left from gross sale proceeds, less closing costs, less mortgage due, less capital gains taxes. A choice to pursue a SLp creates a steering committee to assemble the criteria for sale, guiding a project manager to source prospective buyers. The end goal is to select the most compatible business partner to purchase your property(ies). (Caveat: 20+ years represents a notable period of time in an enterprise’s life; seamless daily operations must continue.)

return on investment

Use of Sale Proceeds. Using sale-leaseback funds to improve a firm’s financial health fine sometimes, analysts say the best use is to reinvest the funds to support the company’s core business operations. “Sale-leaseback deals are definitely a higher-cost form of growth capital,” Ackerman says, emphasizing that companies should have a plan to use at least some sale-leaseback proceeds for expansion (Mitchell, NREI online, 2015).

Equity Investing

The U.S. is still perceived as a very stable economy abroad, and foreign cap rates are traditionally lower than those in the U.S., making the yields more attractive. Banks typically limit loan-to-value (LTV) on financing agreements to 80 percent, but sale-leasebacks allow a company to access the full amount of a property’s value. Firms can use the funds to expand their lines of business, invest in new equipment or even maximize returns after a merger or acquisition, according to net lease broker specialist Stan Johnson Co of Tulsa, OK (Mitchell, NREI online, 2015)

Corp Advisor

To recap, sale-leasebacks are prevalent in low interest rate economics; they tap the value of a property, secure fixed rents/increases, tenant retains daily facilities management; buyer takes title to the land and building, responsible for the physical integrity of the building shell. An established business with a long-term future can attract a high price for their property(ies); returns from the rent income stream are similar to a long-term corporate bond. If your enterprise is considering a sale-leaseback project, please ask your CFO or COO to fill out “Request a Consultation” at the base of About Me in this website. Enter “capitalization” in the subject line, then paste the email signature of their executive assistant the message body. I reply within 24hrs to arrange an exploratory conference call within their calendar. ###

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