Selling and then leasing back property may increase a business's cash flow

Sidney Domb, president, CEO and director, United Trust Fund

As published in Scotsman Guide's Commercial Edition, August 2010.

With banks searching for new ways to generate revenue and increase capital, many companies that own their own real estate are discovering the value of sale-leaseback transactions.

These transactions are structured to unlock the equity a company has in its real estate and to convert that equity into cash. This involves selling the institution's headquarters or branch offices and simultaneously leasing them back long-term.

Many property-owners are recognizing the tax benefits and other advantages of these transactions. Commercial mortgage brokers can advise clients on the benefits and help them find sale-leaseback providers.

In general, by selling and simultaneously leasing back its property, a company can lower its operating costs and use that money to increase its cash flow. Benefits of sale-leaseback transactions include the following:

• Favorable impact on earnings. A sale-leaseback transaction converts noncurrent fixed assets such as real estate into current liquid assets -- i.e., cash. It can generate a gain on the sale when properties' market or appraised values are more than the depreciated book value. Property-owners often can improve their earnings by reinvesting the cash at a greater rate, retiring high-cost debt, funding mergers and acquisitions, expanding operations, or taking advantage of special investment opportunities.
• Regulatory compliance. The cash a business receives from a sale-leaseback transaction can help it improve its primary and total capital-to-assets ratios. The profit on a sale-leaseback transaction from depreciated value to current appraised value can increase a company's net worth.
• Total facility control. Simultaneously with the sale, the company leases back the property for an initial lease term -- typically, 15 years with five five-year options. In effect, this gives the company control of its real estate for at least 40 years. This would be identical to ownership for the property's normal useful life.
• Off-balance-sheet financing. By carefully structuring an operating lease, the transaction would not require capitalization under Financial Accounting Standards Board 13 criteria. In turn, this allows off-balance-sheet treatment, which in effect would have a more favorable impact on the company's earnings and improve its financial ratios.
• Low cost of money. A sale-leaseback transaction can be a quick, economical way to raise capital, compared to the process of originating a new stock issue. Issuing new stock may result in an ownership dilution at unfavorable prices or with unwanted investors. The leaseback is a low-cost technique that avoids these consequences. As a rule, a sale-leaseback transaction should provide capital at an effective cost of 100 to 150 basis points less than that of long-term mortgage financing or the long-term conventional debt market. It should have no restricted covenants and no principal repayment after all lease payments.
• Recapture of all costs. In a typical sale-leaseback transaction, the company would recapture all costs relating to the property's current market value, including legal fees, surveys, architectural, engineering, title, and any other closing costs or property-related fees. This contrasts to conventional long-term mortgage financing, which is usually restricted to 75 percent of the current market value.

Sidney Domb is president, CEO and director of United Trust Fund, which he founded in 1972 for the purpose of purchasing corporate real estate assets and entering a simultaneous net lease with the seller upon acquisition. Domb has been a principal in the real estate development, acquisition, finance and sales business for more than 40 years. He is a recognized authority on real estate sale-leaseback transactions. Reach him at sid@utf.com.