ADVERTORIAL: Sale-Leaseback: An Attractive Way to Raise Capital
A sale-leaseback transaction involves the sale of an asset (such as office complexes, warehouses, sewage plants, water treatment plants, dams, pipelines, medical complexes and shopping malls) and the simultaneous leaseback of the same asset by the seller. In a typical sale-leaseback transaction, the seller sells an asset it owns (use of which is critical to its operations) to a purchaser (typically pension funds or private equity funds specializing in sale/leaseback financing) and retains the right for long-term continued use of the asset through a simultaneous long-term leasing arrangement.
Essentially, the transaction is arranged so that the purchaser/lessor relinquishes control over the asset through a long-term “triple net” lease (lessee pays lease rental, maintenance and property insurance). The long-term lease arrangement gives the seller/lessee the same control and responsibility over the asset as if the entity owned it, without having direct ownership. The seller/lessee can retain future interest in the asset through an option to purchase the asset at the end of the lease term.
Under such an arrangement, the seller/lessee secures long-term capital and benefits from tax deductions on the full lease rental payment; and the purchaser/lessor, as owner, receives a long-term total return on its invested capital.
BENEFITS OF SALE-LEASEBACK
Monetizes “passive,” non-revenue generating asset at market value
Secure long-term funding beyond what obtains in bank market
Improves liquidity, thereby providing cash for other revenue generating investments or a shareholder dividend
Enhance financial ratios (debt/equity, ROA, ROE,ROIC and current ratio)
Management retains control and use of the property through the net lease structure
DRAWBACKS OF A SALE-LEASEBACK TO THE SELLER
Potential capital gains tax implications
Foregone potential future capital appreciation of the asset
Reduced flexibility to renovate or rehab the property
“Locked” into long-term lease
May lose the property at end of lease term if repurchase option is not included as part of lease agreement
Is the asset revenue generating or non-revenue generating?
Does the business need to own the asset or does the business need use of the asset?
Is managing a non-revenue portfolio of assets detracting management from focusing on core revenue generating business operations?
Does the business need stable long-term funding?
Does the business need use of the asset over a long- term period?
Sale-leaseback transactions represent an attractive way to raise capital, while maintaining control over their asset pool for corporates, state agencies and executive agencies which have their own real estate and are seeking cash to fund their operations. This type of transaction can provide an alternative to traditional financing and can be used to finance assets such as expansionary projects, maintenance and operational activities of the entity.