Real Estate Sale – Leasebacks
Unlocking Valuable Capital
By Peter Moore , Principal
Portland, Maine Office, Corporate Finance Associates
& Mark Carroll , Vice President
STAG Capital Partners, Boston, MA
If your company owns its own real estate and it is not leveraged
up too much you are likely sitting
on some seriously under-utilized capital. Many companies own their own real estate and account for it as a depreciating asset on their balance sheet. A sale-leaseback allows the
company to sell its real property to a buyer who then leases it back to the company on a long term operating lease. There is no change of use, no disruption of business, but new
ownership of the asset and a landlord/tenant relationship. Most leases are “triple net” (NNN) with the tenant paying all the expenses of operating and using the property.
Reasons for Sale-Leaseback:
Why do a sale leaseback? Here are two
reasons: 1) If you can generate a better
rate of return deploying capital in the operating
side of your business rather than
using it to own real estate, you are often
better off considering a sale-leaseback. 2)
If you want to maximize the return on
the sale of a company by unbundling the
asset classes to optimize your return a sale-leaseback is
a good choice. (Consult your tax and legal advisers as
all situations vary widely.)
Capturing Full Value for Your Cash Flow:
Most middle market companies today sell in the
range of 4 to 7 times cash flow (EBITDA is the common
measure of unleveraged cash flow of a business).
In contrast, most single tenant industrial and office
properties are currently selling for 9 to 13 times Net
Operating Income (NOI is the unleveraged cash flow
on real property). While the numbers will vary with
each property, conditions and location, investors are
generally willing to pay more for cash flow from long
term real estate leases than they are for cash flow from
operating businesses.
How Sale-Leaseback Improves Your Enterprise Value Return:
Here’s a simple example: Imagine an owner of a company
is contemplating the sale of his
business. The company owns a large
complex that serves as the corporate
headquarters as well as the manufacturing
and distribution facility. Instead of
selling the company and the property
to a private equity firm or strategic
buyer, the owner decides to enter into
a sale-leaseback transaction with a real
estate investment firm specializing in
sale-leaseback deals, prior to selling the
company. The company sells the building
complex to XYZ Real Estate Group
(New landlord) and agrees to pay $1.0MM in net
annual rent. (Sometimes referred to as a “Net Lease”
transaction). The EBITDA of the company will go down
by $1.0MM (or the difference between the net lease
payments and the prior debt service on the property),
which reduces the company value by $6MM (assuming
a hypothetical 6x multiple of cash flow). However, XYZ
Real Estate Group is able to purchase the property for
$11MM (using a hypothetical cap rate of 9.1% for the
property.) This results in $5MM increased
proceeds compared to simply
selling the real estate with the rest of
the company.
If the owner of the company were
not selling his business, the cash
could be used to expand the operation,
purchase equipment, acquire
a competitor, develop new products
and markets, pay down other more
expensive debt or make distributions
to shareholders.
What’s locked up in your real estate?
Please consult your local CFA professional
for a complete evaluation.
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