Using Sale-Leasebacks as a Financing Tool
by Michael Collins
Many door and window companies are having difficulty attracting
capital in the current business environment. Often, such companies look
to real estate sale-leaseback transactions as an alternate source of financing.
In a sale-leaseback, a company sells its real estate to a group of investors
who, in turn, lease the property back to the company. In this way, the
company is able to receive the cash generated by the sale of the company
and still maintain uninterrupted use of the facility on a ten- to 20-year
Sale-leaseback transactions of industrial real estate have
become more common over the years because of a groundswell of investors
willing to invest in industrial property. First Industrial Realty Trust
estimates that 60 percent of all industrial space, roughly 15 billion
square feet, is owned by the corporations that occupy it. This represents
roughly $700 to $900 billion invested in non-core assets.
Mechanics of a Sale-Leaseback
The liquidity created in a sale-leaseback is a function of a number of
factors, including the appraised real estate value, as well as prevailing
lease rates in the area. A capitalization rate determined by the market
is applied to the annual lease payment to determine the total proceeds.
For example, one million square feet of space leased at $2 per square
foot would generate $2 million per year in lease payments. Applying a
capitalization rate of ten to that payment would yield $20 million in
Sale-leaseback investors, meanwhile, increasingly view candidate companies
from a private equity perspective, rather than a strictly real estate
perspective. In other words, they carefully assess the strength of the
company, the way it goes to market, its place in its industry and its
ability to pay the lease payments for a long period of time.
square feet of space leased at $2 per square footwould
generate $2 million per year in lease payments. "
Drawbacks of Sale-Leaseback Transactions
In the last 18 months, the pricing on sale-leaseback deals has been soft
because a number of investors have left the market. Some are tending to
ailing real estate portfolios, while others have retreated because of
the dearth of debt financing. Like merger and acquisition transactions,
sale-leaseback transactions peaked in 2007, the most recent year during
which debt financing was relatively plentiful. However, new real estate
funds are continually being formed.
Assuming that a companyís owners are satisfied with the pricing the market
places on their real estate, the successful completion of the sale-leaseback
will result in a significant lease expense where there was none previously.
Depending on the use of the funds generated, it is likely that the company
will have greater financing related expenses after the transaction, at
least for the short term. Finally, a sale-leaseback does not free a company
from certain real estate-related expenses. Under a triple-net lease, the
lessee (seller) still is responsible for repairs and maintenance.
As the market begins to recover, many door and window companies will find
that their trailing losses prevent them from securing traditional debt
or equity financing. A sale-leaseback gives a company the flexibility
of freeing up capital without ever speaking to a lender. It is likely
that many land-rich door and window manufacturers will explore this financing
option in the next two years. This will be particularly true for companies
located in areas that did not experience a significant run-up in commercial
real estate prices and, therefore, havenít suffered as much of a price
decline. For such companies, a sale-leaseback could be the perfect vehicle
to fund their growth in the coming recovery.
Michael Collins is vice president of the building
products group at Jordan, Knauff & Company, an investment banking
firm that specializes in the door and window industry. He may be reached
His opinions are solely his own and not necessarily those of this magazine.
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