More companies turn to sale-leasebacks to access capital

Real Estate Weekly, May 21, 1997 by Gary Sopko

In a conventional sale/leaseback, a company sells the commercial real estate it owns outright, then leases the facility back from the investor on a long-term basis, thereby re-deploying the capital to higher yielding endeavors such as new product introduction, market expansion or acquisition opportunities.

Companies are turning to sale/leasebacks as a way of maximizing their capital resources and meeting their occupancy needs at the same time. Ownership of property does not deliver the same benefits that it did in the Eighties. Many of today's companies are literally sitting on illiquid capital that could be used to revitalize or expand their business operations. This can be achieved quickly and without disruption of day-to-day operations through a sale/leaseback.

There are a number of business objectives that can be satisfied through a sale/leaseback. Ideal candidates for sale/leaseback financing include: companies seeking more efficient ways to generate capital for various business endeavors; companies under increased pressure to improve performance from lenders or shareholders; companies refocused on core compotencies and businesses; companies seeking strategic or financial acquisition; and companies looking to outsource real estate activities.

Business expansion is one of the most common motivates for pursuing a sale/leaseback. New product launches or improvements are expensive propositions and commercial lenders have typically avoided financing these needs without sufficient liquid assets as collateral. Through a sale/leaseback, a company can turn the value of its real estate into capital to facilitate business growth.

Larger companies have been the most eager to take advantage of sale/leasebacks, but there is a growing niche of middle market companies tapping into this innovative financial tool; companies with annual revenues between $20 million and $500 million. The impact of the sale/leaseback to mid-sized companies can be tremendous. These are the companies that take advantage of the new-found liquidity and capitalize or market opportunities.

The benefits of a sale/leaseback are many. It allows companies to raise the full value of their properties, unlike the discounted loan values provided by traditional mortgage financing. It is also a great way to unlock cash and improve utilization of corporate assets. Additionally, by removing the property ownership obligation or taking it "off-balance sheet," financial ratios are positively impacted and borrowing capacity may be significantly increased.

Structuring the lease with right-of-first-refusal sale provisions or periodic purchase options will assure future control of the property without ownership. Operating costs will be comparable or perhaps even lower for the former owner, and leases can be structured to meet a company's earnings and cash flow requirements. The sale/leaseback may very well be the remedy to slow business growth, and it may provide companies with the capital needed to stimulate under performing business operations.

When a company decides it is interested in a sale/leaseback, what it looks for next is value, speed and a firm that, because of its knowledge and experience, can eliminate the complexities of this type of transaction. Companies interested in this unique financing resource need to find an investor with substantial financial resources, one that will recognize the full value of the property, and has the financial strength to complete the transaction in a timely fashion by negotiating, underwriting and funding the purchase in-house.

Large financial institutions do not adequately serve the real estate needs of mid-sized companies and the capital markets focus primarily on credit tenants for sale/leaseback transactions. Currently, the demand for this type of transaction with the middle market is being met by Bedminster Capital, L.L.C. Our company has developed a proven track record of assisting mid-sized companies, both private and public, on how to maximize their real estate usage and meet their financial objectives through the re-deployment of real estate capital to higher yielding endeavors.