SALE AND LEASEBACK. SOMETHING FOR YOUR BUSINESS?

DISCOVER THE ELEMENTS THAT MAKE A SALE-AND-LEASE-BACK A WIN-WIN OPERATION.

Finance tower

Earlier this year, it hit the news: the Finance Tower in Brussels was sold for a record sum of over €1.2 billion. This despite the fact that the building was sold in 2001 by the Belgian government in a sale-and-leaseback transaction for €311 million. Taking into account the €325 million renovation cost, the investor realized a (too) substantial capital gain in less than 20 years. This sparked debate about the merits of the sale-and-leaseback transaction at the time. In this article, we delve deeper into the elements that make a sale-and-leaseback a win-win situation.

Definition of sale and leaseback

Before we go any further, we’d like to explain what a sale and lease back is.

A sale-and-leaseback transaction involves an owner selling their building to another party to continue occupying it as a tenant. The result of this transaction is that the seller increases their cash flow and partially or fully repays the debts related to the building. In return, the seller pays rent to an external party from that point on. They also shift responsibility for some of the building’s structural maintenance to the new owner.

When to consider?

Many companies have already faced difficult times in recent months or are facing difficult times in the coming months. Some have had to dip into their financial reserves and are now finding it harder to obtain financing from banks. A sale-and-leaseback can provide breathing room for companies that need it.

Not only struggling companies, but also those that have experienced growth and lack the cash to sustain their growth sometimes opt for a sale and leaseback. With such an operation, they aim to optimize their balance sheet.

The selling price of the property will depend on a number of elements:

Condition of the building

Naturally, the building’s condition influences the price. The better the building is maintained and the fewer investments the new owner needs to make, the higher the selling price. The building’s age also plays a significant role. Certain structural elements of a building have a limited lifespan. Classic examples include the roof and heating and air conditioning systems. The newer these elements are, the lower the risk of (major) short-term costs.

Rental price

With a sale-and-leaseback, the seller can initially determine how much rent they are willing to pay. The more rent the seller (and therefore the future tenant) is willing to pay annually, the higher the sales price will generally be. However, there are limits. A rent that is significantly above market value isn’t always considered attractive to investors. After all, it reduces the likelihood of an extension at the end of the lease. Therefore, it’s important that the rent doesn’t deviate too far from market levels, otherwise, some investors will be put off.

Duration

Investors are generally risk-averse. The biggest risk for an investor in commercial real estate is vacancy. The longer a tenant commits to a lease, the more secure an investor’s income. Many investors are therefore willing to accept a lower return in exchange for the security of income. In principle, therefore, one can assume that the longer the seller/tenant commits, the higher the sales price will be.

Investors often prefer to work with tenants who commit for a period of between 6 and 12 years. Longer than 12 years becomes less attractive to investors. This prevents them from making sometimes necessary investments that ensure their building continues to meet new standards (e.g., insulation). This argument is less compelling for single-tenant buildings.

Return

Once the rent has been set, the selling price is determined based on the desired return for an investor. The ratio between the rent (an income for an investor) and the selling price (an expense for the investor) is the return, also known as the yield. An investor will always strive for the highest possible yield. A seller wants to achieve the highest possible selling price relative to the rent they are paying and therefore wants to keep the yield as low as possible. The effective yield of a building is determined by the supply and demand for similar buildings in the area. A local expert naturally has the best insight into market-based yields in a specific region.

Conclusion 

There are several factors to consider when determining whether a sale and leaseback is beneficial for a company. Are you wondering if a sale and leaseback could be beneficial for your company? Or are you looking to invest in a building that’s leased long-term? Don’t hesitate to contact us. We’re ready to discuss all of the above factors with you.