Sale-Leasebacks Get Clients Back on Track
Taken from Scotsman Guide August 2010
By Sidney Domb, President, CEO and director United Trust Fund
Selling and the leasing back property may increase a business’s cash flow
With banks searching for new ways to generate revenue and increase capital, many companies that own their own real estate are discovering the value of sale-leaseback transactions. These transactions are structured to unlock the equity a company has in its real estate and to convert that equity into cash. This involves selling the institution’s headquarters or branch offices and simultaneously leasing them back long-term. Many property-owners are recognizing the tax benefits and other advantages of these transactions. Commercial mortgage brokers can advise clients on the benefits and help them find sale-lease-back providers. In general, by selling and simultaneously leasing back its property, a company can lower its operating costs and use that money to increase its cash flow. Benefits of sale-leaseback transactions include the following: *Favorable impact on earnings. A sale-leaseback transaction converts non-current fixed assets such as real estate into current liquid assets – i.e., cash. It can generate a gain on the sale when properties’ market or appraised values are more than the depreciated book value. Property-owners often can improve their earnings by reinvesting the cash at a greater rate, retiring high-cost debt, funding mergers and acquisitions, expanding operations, or taking advantage of special investment opportunities.
*Regulatory compliance. The cash a business receives from a sale-leaseback transaction can help it improve its primary and total capital-to-assets ratios. The profit on a sale-leaseback transaction from depreciated value to current appraised value can increase a company’s net worth.
*Total facility control. Simultaneously with the sale, the company leases back the property for an initial lease term – typically, 15 years with five five-year options. In effect, this gives the company control of its real estate for at least 40 years. This would be identical to ownership for the property’s normal useful life.
*Off-balance-sheet financing. By carefully structuring an operating lease, the transaction would not require capitalization under Financial Accounting Standards Board 13 criteria. In turn, this allows off-balance-sheet treatment, which in effect would have a more favorable impact on the company’s earnings and improve its financial ratios.
*Low cost of money. A sale-leaseback transaction can be a quick, economical way to raise capital, compared to the process of originating a new stock issue. Issuing new stock may result in an ownership dilution at unfavorable prices or with unwanted investors. The leaseback is a low-cost technique that avoids these consequences. As a rule, a sale-leaseback transaction should provide capital at an effective cost of 100 to 150 basis points less than that of long-term mortgage financing or the long-term conventional debt market. It should have not restricted covenants and no principal repayment after all lease payments.
*Recapture of all costs. In a typical sale-leaseback transaction, the company would recapture all costs relating to the property’s current market value, including legal fees, surveys, architectural, engineering, title, and any other closing costs or property-related fees. This contrasts to conventional long-term mortgage financing, which is usually restricted to 75 percent of the current market value.
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