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Sale-Leaseback Can Help Balance Sheet PBN .com PROVIDENCE UPDATED DAILY FEB.4-10, 2008 VOL. 22, NUMBER 43 $1.50 ©2007 Providence BUSINESS NEWS Business News Inc. YOUR LOCAL SOURCE FOR BUSINESS NEWS IN SOUTHERN NEW ENGLAND Sale-leaseback can help balance sheet If your company owns the buildings or it back, it is possible to improve your bal- I Continued Costs land on which it conducts its operations, ance sheet. This occurs in a sale-lease- In a sale-leaseback transaction, the you could be sitting on a large, untapped back as you are typically removing a typical lease entered into by the seller and available source of non-income-producing, fixed asset (the and buyer is a “triple net lease” which capital. By entering real estate), as well as the liabilities asso- requires that the seller, as lessee, is indi- into a sale-leaseback ciated with any mortgage on that asset. rectly responsible for paying the taxes, transaction, your com- The new lease payments are considered maintenance fees and insurance costs pany could potentially current operating expenses, not liabili- associated with the property. draw out that capital ties. They do not appear on the balance I Little Immediate Gain Upon Sale while maintaining sheet, resulting in improved leverage In the case of an operating lease, any many of the positive ratios and net worth ratios. Additional- gain or loss on the sale in a sale-lease- benefits of property ly, with the sale of the property, there is back transaction should generally be ownership. often an accompanying reduction in deferred and amortized in proportion to I What is a sale- interest and depreciation rental payments over the GUEST leaseback? expense. period of the lease. COLUMN The term “sale- I What happens to the I No Appreciation in By David Rubin leaseback” refers to a property now that I’m Your company Property Value and transaction where a just a tenant/lessee? The seller is potentially company sells its real In a properly structured retains control losing any long-term appre- Paul Hedstrom estate to a buyer (usu- sale-leaseback transaction, ciation of the property. ally a bank, financing the seller retains nearly all over its real I No Retention of company, private the benefits of ownership – Right to Repurchase investment firm or the seller continues to occu- To ensure that the lease- REIT) and then simul- py the property just as estate while back qualifies as an operat- taneously leases the before the sale, with a fixed ing lease, it must be struc- property back under a lease term with fair-mar- receiving an tured such that there are long-term lease. The ket-value renewals. Addi- no prohibited forms of con- seller receives 100% of tionally, the seller has the infusion of tinuing involvement in the the fair market value right to make value-added ownership of the property. of the property and, if leasehold improvements to capital. Among other things, this properly structured, continues to have the property, retaining the means that if your compa- complete operational control of the prop- right to spread its cost over ny sells its property, it can- erty. its useful life, as with any depreciable not maintain an option to I Why should I sell my property? asset. purchase back the property at a bargain The sale-leaseback is primarily a tool I Planning on selling your proper- price; its lease term cannot be for longer for freeing up capital from real estate ty in the future? than 75 percent of the property’s estimat- assets so it can be reinvested where it is If you already know that you won’t be ed useful life; and the property cannot needed most – in the operations of your keeping the property in the long run, a automatically revert to your company at business. The key concept in a sale- sale leaseback is a great mechanism to the end of the lease term. In sum, your leaseback is that your company retains sell that asset for 100 percent of the fair company, as seller and lessee, must actu- control over its real estate while receiv- market value, while ensuring your abili- ally give up its ownership interest in the ing an infusion of capital. The avenues ty to occupy the property during the property, and not just for the short term. to which you apply that capital are up to short term. In many instances, buyers Notwithstanding these concerns, the you. It can be used to pay down your are eager to purchase a property know- use of the sale-leaseback vehicle to improve the balance sheet of companies company’s outstanding debt and ing that a stable, credit-worthy tenant is remains an attractive option in today’s improve its debt-to-equity ratio. If your already in place. current commercial real estate land- company is publicly traded, you could Of course, it would be overstating the scape. I buy back shares of your stock, increas- utility of the sale-leaseback transaction ing your company’s value per share. to say that there are no concerns for the I How would it affect my balance seller. David Rubin, Esq., and Paul Hedstrom, sheet? The “downside” to the seller in a sale- Esq., are partners at Hinckley, Allen & By selling your property and leasing leaseback transaction includes: Snyder LLP. Providence Business News ©2008. Reprinted with permission, all rights reserved.
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