FEATURE ARTICLE, MAY 2004

MONETIZATION OF OWNED REAL ESTATE VIA
SALE/LEASEBACKS
Converting owned assets to leases via sale/leasebacks offers many advantages to corporate owners of real estate.
Jeffrey Shell

Many companies today are exploring ways to monetize owned real estate as part of an active corporate strategy to maximize the value of their real estate, capital and credit. Although there are a variety of attractive alternatives available to finance continued ownership, many companies choose converting to leasing via a sale/leaseback as the preferred solution.

For most businesses, the timing is opportune for two significant reasons. First, all but the strongest credit companies find accessing capital difficult and/or expensive through traditional means. A sale/leaseback taps new sources of capital outside those of traditional corporate finance. Second, a distinct lack of attractive investment alternatives has dramatically increased the number and type of investors for corporate assets under sale/leasebacks. Private and institutional investors view real estate as a preferred asset class today, with a strong preference for the stability and security of medium- and long-term leases with corporate users.

Some advantages of converting owned assets to leases via sale/leasebacks include:

• Favorable cost of long-term financing. The combination of historically low interest rates and 25- to 30-year debt amortization schedules provide attractive leverage. Additionally, an abundance of investors chasing too few deals has substantially reduced equity return requirements. Combined, low cap rates yielding maximum proceeds/minimum rent are favorable to the corporate seller/lessee.

• Improved financial performance. Sale proceeds raise cash while improving key financial ratios such as return-on-assets, return-on-equity and debt-to-equity. The additional cash, and the removal of depreciation expense, resulting from the sale increases earnings per share. Rent expense for operating leases is reflected in the footnotes and not on the balance sheet.

• Unlocked liquid capital for growth and operations. Capital locked in bricks and mortar provides no real return to the business. Most companies achieve a significantly higher return on capital invested in their core business than the cap rate defining the lease expense under the leaseback.

• Raised capital via non-traditional sources. Investors and their lenders are an entirely new source of financing, and sale/leasebacks typically do not require restrictive debt covenants. Additionally, using proceeds to pay down debt enhances future borrowing capacity by de-leveraging the company.

• Obsolescence and residual risks of ownership are transferred to a lessor. For quality real estate assets, aggressive pricing can be achieved with leaseback terms as low as 7 years, making a sale/leaseback a strategic option for maximizing proceeds today while planning a future relocation. Additionally, a sale and partial leaseback may be an attractive option for companies that have downsized and have smaller space requirements.

• Long-term control of property. Lessees can maintain flexibility and asset control for extended periods through renewal options, expansion rights and other lease clauses. The timing for monetization of owned real estate via sale/leasebacks is favorable from the perspective of both the corporate seller/lessee and the investor purchaser/lessor. Corporate sale/leasebacks satisfy investor appetites for real estate investments with leaseback terms that extend beyond the current weakness in most real estate markets. Corporations can unlock capital from nonproductive assets to raise cash, improve balance performance or transfer ownership risks while planning a cost-effective exit from the property.

Jeffrey Shell is senior director, financial services in the Detroit office of Cushman & Wakefield.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.