Sale and Lease Back

Did you know that by selling a low performing asset such as real estate, a company can improve its liquidity and allow its shareholders maximum exposure to its core business?

Sale and Lease Back is a financing facility that allows a company to sell its owned real estate and simultaneously lease the property back on a long-term basis. The company would retain complete operational control over the property, as if it were the owner.

By freeing capital tied up in their sometimes massive real estate holdings, a higher rate of return can be generated from a company's primary business as apposed to the moderate return on real estate.

One of the single biggest reasons why a company would undertake a Sale and Lease Back is to gain off-balance-sheet financing. This is an important consideration: If there's a loan on the property, its full amount is clearly on the balance sheet as a liability. For most operating leases, or Sale and Lease Back, the only thing shown on the balance sheet is that year's obligation or lease payments, which casts a far more favorable eye on the balance sheet.

Furthermore, Sale and Lease Back allows a company to better diversify its financing obligations both in terms of exposure to interest rate risk and refinancing risk (fixed interest v floating)

Compared with traditional debt financing, a Sale and Lease Back will generate a 100% of the asset's value, where traditional financing would only offer around 60-70%. Sale and Lease Back also provides an agreed upon annual rent for the asset, rather than a single lump payment. These lease payments may be structured in more flexible ways; for example, low rent payments during the first five years make it more comfortable for corporations from a balance sheet point of view.

Of all their real estate holdings, a company would generally choose to lease back a more practical purpose facility such as an office building or factory, as the lease can usually be structured to cost less. To lease back a more specialised facility, such as an oil refinery, would present a higher risk to an investor, so would cost more to the lessee. An investor would look at this type of facility as very difficult to lease out if the current tenant were to vacate.

In addition, since lease back financing does not impose any operating covenants, as is the case with traditional financing, a company can gain more operating flexibility. Many companies are often saddled with onerous and restrictive debt covenants; they have to operate in a certain way or may be declared in default of the covenants. Lease back financing eliminates these operating covenants and provides more flexibility to the lessee.

Lease Structure:

Lease Pricing:

Operating Lease v Capital Lease Treatment:

A Sale and Lease Back transaction will normally structured as an operating lease, but will be considered capital a lease in certain circumstances. A Sale and Lease Back is treated as a capital lease when:

1. There is a buy-back agreement written into the lease
2. There is a buy-back option at a bargain price
3. It has a long-term lease that exceeds 75% of the property's usable life
4. The lease value is greater than 90% of the property value

Pre-payment Penalties from Existing Mortgages:

Mortgage pre-payment penalties (if any) can be capitalized into a Sale and Lease Back transaction price. What types of property can be used in Sale and Lease Back? Almost any property type is eligible for Sale and Lease Back financing, including warehouse-distribution, manufacturing, office and retail, hotels and hospitality properties. Sale and Lease Backs can finance existing properties or properties planned for development, and can be used for single buildings or portfolios of properties

Why consider Sale and Lease Back?

A Sale and Lease Back transaction would increase shareholder value and improve company liquidity. A Sale and Lease Back releases capital tied-up in a low-returning asset, and allows a company to invest in its higher-returning core business or repay existing debt.

Do shareholders prefer a company to own property?

Most shareholders invest in a company because they want exposure to its core business. Shareholders that want exposure to real estate can invest more efficiently in REITS, which are run by professional real estate managers. Many of the world's top companies lease all of their facilities, and more are moving in this direction.

When should a company own real estate?

A company should own real estate only when the asset represents something unique to the business, making it worth more to the company than to anyone else. Examples include Boeing's giant aircraft assembly facility, and Disney's theme parks.

How long does a Sale and Lease Back transaction take to complete?

Most of our clients are experienced Sale and Lease Back investors qualified to meet a company's often diverse real estate requirements. Once a letter of intent has been executed, they will generally complete a transaction within 45 days with cash on hand and without a financing contingency. This ensures certainty of funding and execution.

How can Forbes Le Brock help your company with Sale and Lease Back?

We can introduce you to investors with funds already in place in Thailand, thus eliminating the fees imposed by overseas representatives, agents, and currency transactions.

These clients include local and international public and private REITS, private investment funds, financial institutions and qualified private investors that hold more than US$10 billion in real estate assets, and have over US$1 billion of equity capital to invest in real estate in Thailand over the next 2 years.

Sale and Lease Back real estate in Thailand is typically valued at 100% of market value as determined by an independent appraiser.

For further information on the benefits of 'Sale and Lease Back' in Thailand, please complete the enquiry form, and include your full contact details and exact requirements.

The information set out above is for guidance only. No representation is made in respect of this information. Interested parties should consult their real estate lawyer prior to any Sale and Lease Back transaction.