Sale and Leaseback of real estate

Real estate strategy – competitive edge

 

• Companies that are in developing phase and under heavy competition search growth and competitive advantage by rearranging assets
• —Directing the assets and the attention of directors to core business cause quicker growth than that of competitors
• The real estate strategy of a developing company is usually not the ownership —

The main reasons for change

• —Globalisation forces also the traditional industries to reevaluate their real estate strategy. —
• The changes in society and its concentration into bigger entities forces public sector to find new models which increases the liquidity of public real estate
• —The productivity of real estate assets doesn’t match the core business productivity
• —Life cycle efficiency enchancement
• The importance of financing is increasing and the property moves up in the hierarchy of corporate decision making
• Property doesn’t create revenue
• Global competition forces to soften the traditional ”family silver”-like attachment
• The free movement of assets including real estate

The real estate sale & leaseback is an innovative financing solution

• Allows to convert existing illiquid real estate assets into working cash at fair market value that can be used to finance
  • Investments into more productive core business operations
  • Buying businesses (good financial situation allows expanding in recession/depression with reasonable price)
  • Debt reduction or consolidation
  • Share repurchase when the shares are undervalued on the marketplace
  • Dividend paying
• Sale & leaseback provides 100% financing of real estate vs. conventional financing that could be 50%-70%
• There are no restrictions on the use of funds provided by sale & leaseback financing. Also negative covenants are not applied to these funds as in normal borrowing agreements with banks or other lenders.
• When selling the company it can be impoverished by buying own shares or paying extra dividends with sale & leaseback funds in order to adjust the price for the buyer
• In the family company the exit of some family member can be realized by buying back member’s shares with the funds
• A financial option if debt or funds raising from share holders want to be avoided
• ”Sale & leaseback” is a financial option also for the new premises

Sale & leaseback in practise

• The real estate asset or real estate company (REC) is sold to an investor and leased back
• Allows to retain the complete operational control of the property for as long as it is required in the business.
• Sale & leaseback can also fund new construction, including the cost of the land acquisition. The company never has to tie up capital or credit in land or buildings.
• The seller and the lessee don’t have to be the same juridical person
• The lease agreement can include options for lease term extensions, financing the new buildings if there is remaining building right, preemption right, subleasing etc.
• Sale & leaseback has been made with diversified real estate – offices, factories, power plants, harbours, hospitals etc.
• The price offered is mostly influenced by the property type and quality, lease term lenght, location and the tenant specific factors
• The sale & leaseback can be made for the single real estate or for the portfolio in single or several countries
• It is essential for the seller to find a buyer with whom the long-standing partnership works and who is also flexible in the lease terms. In some businesses the lease terms can be even more important than the price.

  Sale & leaseback process

• Data gathering about the properties, property visits
• Defining the financial and functional constraints which makes the arrangement reasonable to the company (lease levels, lease terms, target selling prices, options)
• The decision to start the project
• Consulting agreement with Terrum
• Terrum prepares an investment memorandum and helps targeting the marketing
• A non-public marketing is a default
• Non-Disclosure Agreement, NDA is made with every investor that needs other than public domain information in order to offer
• The analysis of the proposals and additional negotiations with potential investors
• Choosing the investor
• The investor makes real estate and company Due Diligence  
• Signing of the purchase and lease agreements
• Closing

It is essential for the seller to find a buyer with whom the long-standing partnership works and who is also flexible in the lease terms. In some businesses the lease terms can be even more important than the price. —With its knowledge about investors Terrum Oy helps the client to target the marketing into those investors who are believed to fullfill best the requirements of the client.

Terrum Oy has no ownership ties with investors. Our services cover from single real estate to portfolios in Finland and abroad.