spark sale-leaseback strategy

Sale-Leaseback StrategyTapping the value of your real estate to enhance competitiveness and maximize value.

Accelerating success.

Today we see two primary drivers that are prompting business owners to contemplate these strategies: Global & Regional Economic Conditions are driving the need for increased productivity to ensure that businesses remain profitable and competitive, often translating into a requirement for major capital investment in equipment and systems. Commercial Property, as an asset class, is in high demand from many types of investors, ranging from the larg-est pension funds, Real Estate Investment Trusts to private investors. Values are high and properly priced assets sell quickly, making this an excellent window in which to execute a sale. The slow growth and recessionary environment around the globe has created a challenging environment for companies across many sectors, particularly those engaged in exports. However, these circumstances have produced an ideal environment in which real estate thrives; assets are po-sitioned as attractive investments reinforced by an ultra-low interest rate environment. Companies that require capital may determine that the equity tied up in a real estate asset could produce a higher return if invested into the core business. This is where a sale-leaseback can be an excellent approach. Employing this strategy allows the organization to extract capital from real estate, and re-deploy it where needed, without disrupting day-to-day operations. Where the owner wishes to dispose of the operating business and related property, the timing is also right for maximizing value.

Current commercial property market conditions in Canada are excellent and look to remain that way in the near term. Now

is a great time to evaluate the sale-leaseback option and be poised to execute if the strategy fits, before commercial property market conditions begin to shift. As the Global economy recovers, a counter-intuitive pull-back in demand for Canadian real estate may occur, as other investment options could become more attractive and compete for capital.

Demographics indicate that many small to medium sized organizations are owned by baby boomers. These individuals are approaching retirement and will need to grapple with succession planning, or examine the disposition of their businesses. A sale-leaseback or complete disposition strategy may work very well given today’s market conditions and help the retiring owner maximize value of the real estate. nto a requirement for major capital investment in equipment and systems. Commercial Property, n

Sale-Leaseback StrategyHow to unlock the value in your real estate and re-distribute it where you need it most.

Benefits > Unlocked equity that can be used to reduce debt

> Redeployed equity from real estate into a core business, allowing for expansion or re-investment

> Lease payments are deductible operating expenses

> Operations that remain in place without disruption to employees, suppliers or customers

> A strengthened financial picture by moving a fixed asset, that is likely carried below market, off the balance sheet and replacing it with cash

> Releasing capital for the business owner’s retirement funds

Strategy #1

THE SALE-LEASEbACkThe sale-leaseback occurs when ownership in the operating business will not change; the original owner sells the property and at the same time, signs a lease agreement with the new property owner. The proceeds of the property sale are then available for use in the core business. In the case of a retiring, or soon-to-retire business owner; the property sale proceeds form a component of the owner’s retirement funds. In this approach, the owner monetizes the value of the property for their personal use and maintains ownership of the operating business.

Are Conditions right? Assessing the Sale-Leaseback Opportunity:before going too far down the road, it is important to perform an assessment of the opportunity. Marketability of the real estate, and the strength of the financial covenant the operating business can provide on a lease, should both be considered.

1. The real estate should be well located for its purpose. It should also be functional and well maintained by today’s standards. In simple terms, it needs to be marketable in the future to prospective tenants or purchasers as a part of the acquirer’s investment strategy.

2. The lease covenant provided by a business is the next major component. The financial strength and track record of an operating business, without the real estate asset on its balance sheet, will need to be healthy enough to provide comfort to both the prospective purchaser and potentially, the financial entity that underwrites the loan for acquisition.

Strategy #2

FULL bUSINESS DISPOSITIONIn a complete sale of both the business and real estate, two different strategies may be employed.

1) When the acquiring business is larger and financially stronger than the original owner, it can be effective to sell the business first and subsequently sell the real estate. This adds value to the property due to the financial strength of the new business which provides a stable tenancy and secure cash flow, making the property more attractive to investors.

2) Where the acquiring business is similar, or smaller in size than the original owner, it is prudent to have the real estate valued separately from the operating business to ensure that the property sells at full market value to either the acquiring business or to a third party. Often when the property and operating business are bundled, it is difficult to ascertain if full value has been realized for both assets.

A kNOWLEDGE LEADER PUbLICATION

Leases property back from Purchaser, maintains

ownership of business.

Purchases Land & Buildings

PUrChAser

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FinAL ThOUGhTSThis paper has touched on some of the drivers of sale-leaseback and related transactions that are currently creating interest for business owners. The ebb and flow of both financial and real estate markets will dictate strategy and timing, as well as warrant in-depth analysis for each asset in the context of its market and timing of the transaction. At present, the Canadian commercial property market is very strong. Careful monitoring of market dynamics will be important to optimize the results of any potential transaction. Our hope is that this general overview will provide food for thought. Like all major financial and legal transactions, these strategies should be reviewed with tax and legal experts, as well as real estate advisors to ensure a prudent and strategically sound approach for your unique business and financial plans.

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hoW it WorKs >

SPARk | SALE-LEASEbACk STRATEGY

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