Sale Leaseback Financing

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A sale-leaseback, structured properly with an operating lease can provide the seller/tenant in the sale-leaseback with a number of advantages. Most significantly, a sale-leaseback converts illiquid real estate assets to capital, while allowing the sale-leaseback seller/tenant to retain use of the assets for business purposes, providing full control of the real estate under lease provisions. Sale-leasebacks provide a generous amount of capital, as typically the sale-leaseback seller/tenant receives 100% financing based on the appraised value of the property. Another advantage is that the cash realized from the sale-leaseback transaction can then be reinvested in the sale-leaseback seller/ tenant’s business and used to enhance liquidity, expand operations, acquire other businesses, reduce debt, invest in 1031 exchanges, etc. Furthermore, seller/tenants in sale-leasebacks typically experience a reduction in expenses and an increase in cash flow as a result of the favorable long-term lease and the tax deductible lease payments in the sale-leaseback. Lastly, a key advantage of sale-leaseback financing is that operating leases that do not appear on the sale-leaseback seller/ tenant’s balance sheet as debt or as a long-term lease obligation (albeit this is currently under scrutiny by FASB- stay tuned for further updates), which in turn decreases the sale-leaseback seller-tenant’s debt-to equity ratio, and makes the sale-leaseback seller-tenant more attractive to banks and other third party lenders.

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<!– /* Font Definitions */ @font-face {font-family:”Cambria Math”; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:-1610611985 1107304683 0 0 159 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} @font-face {font-family:”Swis721 Lt BT”; panose-1:2 11 4 3 2 2 2 2 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:135 0 0 0 27 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:”"; margin-top:0in; margin-right:0in; margin-bottom:10.0pt; margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:”Calibri”,”sans-serif”; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:”Times New Roman”; mso-bidi-theme-font:minor-bidi;} p {mso-style-noshow:yes; mso-style-priority:99; mso-margin-top-alt:auto; margin-right:0in; mso-margin-bottom-alt:auto; margin-left:0in; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”,”serif”; mso-fareast-font-family:”Times New Roman”;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:”Times New Roman”; mso-bidi-theme-font:minor-bidi;} .MsoPapDefault {mso-style-type:export-only; margin-bottom:10.0pt; line-height:115%;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} –> In sale-leaseback financing, the tenant typically signs a long term triple net lease.

Under this triple net lease, the tenant maintains and manages the property on-site. The tenant also insures the real estate, pays all of the property expenses and pays the property taxes directly to the taxing authority. The tenant is also responsible for the roof and structure.  In some instances, the tenant is held responsible in the event of a disastrous event.

Sale-Leaseback, Leaseback, Sale and Leaseback

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Sale leaseback financing defines a transaction in which a real-estate asset is sold and then the seller leases that property from the buyer for a period of years. As an example, in a sale leaseback, a company sells one or more of their owner occupied properties to an investor, usually for fair market value. In the second step of the sale-leaseback process, the investor provides the seller with a triple-net operating lease, typically for a period of 10 to 25 years (and the option to renew the lease at the end of the term) so that the company/ seller can continue to occupy the property. In a typical sale leaseback, the seller/tenant usually pays the investor a negotiated annual rent equal to 7.5% to 12% of the contracted sale price. Most often, the rate in a sale leaseback is credit-driven and the real estate sold in the sale leaseback is considered to be additional collateral. Sale-leaseback financing thus enables the seller to utilize the property, but frees the seller from having capital tied up in the asset.

leaseback, sale and leaseback, sale-leaseback, sale leaseback

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Albeit asking prices are much higher (lower cap rates)………

The cap rate for a sale-leaseback financing currently varies from 7% to 12% (plus or minus) of the properties purchase price, depending on the financial strength of the tenant, rent increase and tenants responsibilities. For example, a new franchisee with no prior experience would be considered very high risk. A multi billion-dollar profitable corporation with good management, that has always fulfilled its lease obligations, with an investment grade rating (Moodys, Standard & Poors or NAIC) would be the lowest risk and earn the lowest rate. We are seeing a rise in cap rates every month!

Sale-leaseback financing is where a private or public company sells their owner-occupied real estate to an investor for fair market value. The investor provides the seller with a triple-net operating lease for a negotiated period of 10 to 25 years. Initially, the seller/tenant usually pays the investor an annual rent equal to 8% to 15% of the contracted sale price. The rate is usually credit-driven. If agreed to there may be scheduled rent increases during the term of the lease.

TYPES OF PROPERTIES

Sale-leaseback financing is available for all types of existing or build-to-suit real estate, including:

· Service Centers;

· Office Buildings;

· Fast Food Establishments;

· Distribution Warehouses;

· Health Care Facilities.

· Industrial Facilities;

· Retail Stores, and·

Educational Buildings;

EXPERIENCE

Since 1992, Jonathan S. Horn (“Horn”), President and founder of Horn Capital Realty, Inc., has recognized the potential for substantial owner and investor benefits from sale-leaseback transactions, and he has focused his efforts specifically on those types of commercial real estate investments. Horn is one of the most experienced, efficient and cost effective sale-leaseback facilitators in the United States. He has successfully closed more than three quarters of a billion in sale-leaseback financing transactions, net-leased sales and debt and equity placements with large national tenants such as:

· Blockbuster Entertainment

· NorAm Energy

Dairy Mart

· NYNEX

· Eckerd Drug

· Payless Shoe Source

· Haverty Furniture

· Taco Bell

· Home Depot

· United Auto Group

· KFC

· Wal-Mart

· Kmart

· Walgreen Drug Stores

· Monro Muffler

· _ Whole Foods

HCR SALE-LEASEBACK BENEFITS*

HCR, is one of the industry’s most efficient and cost effective facilitators of strategic sale-leaseback transactions. He has the resources to offer corporate owners of real estate the opportunity to convert property to cash faster, with better terms and at a lower cost, than other diversified investment bankers, commercial banks or institutional advisors. The HCR sale-leaseback can provide your company with the following business advantages:

· 100% financing based on the appraisedd value of the property;

· Operating leases that do not appear on your balance sheet as debt or as a long-term lease obligation;

· Full control of your real estate under lease provisions;

· Tax deductible lease payments, and

· Cash realized from your sale-leaseback transactions can be used to reduce debt, expand operations, acquire other businesses, and enhance liquidity.

* Discuss these benefits with competent tax and legal experts prior to finalizing a sale-leaseback transaction

For more information on sale-leaseback financing and build-to-suit development, please contact:

HORN CAPITAL REALTY, INC.

Strategic Conversion Of Real Estate To Capitalä

1177 Kane Concourse, Suite 301 ¨ Bay Harbor Islands, Florida 33154

305-864-2000 ¨ e-mail: jsh@horncapital.com

www.horncapital

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Companies that should consider sale leaseback financing are:

(1.) Companies that own and occupy properties with considerable equity, based on current market value- sale leaseback financing would benefit them;

(2.) Companies that want more flexibility in retaining, moving or disposing of their business locations- sale leaseback financing would benefit them;

(3.) Companies that do not want to own illiquid real estate assets-sale leaseback financing would benefit them; and

(4.) Companies that want less debt on their balance sheet and more tax deductions on their annual tax returns-sale leaseback financing would benefit them (stay tuned more FASB rulings in 2011 which could change this).

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The types of properties suitable for utilizing sale-leaseback financing, but not limited to are, Service Centers, Office Buildings, Fast Food Establishments, Restaurants, Distribution Warehouses, Industrial Facilities, Retail Stores, Educational Buildings and Health Care Facilities, etc. Any multi-tenanty type property (shopping center, office building) which the seller/tenant would be willing to master lease in its entirety, could be suitable for sale-leaseback financing.

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The strategic conversion of corporately owned real estate into working capital has proven extremely beneficial to corporations, particularly as their executives are scrambling to find funds to help grow their companies. The benefits of sale-leaseback financing has become all the more obvious with the economic slowdown and the tightening of the credit markets. Companies have found that access to their traditional capital resources has become more restricted, which in turn, has impacted their ability to access competitively priced debt. Under these circumstances, the advantages of sale-leaseback financing has emerged as a unique opportunity to raise capital without clouding one’s balance sheet with long-term debt.

Sale-leaseback financing can be defined as a corporate entity selling their owner occupied asset to an investor, usually at a fair market value- Price is usually based on an appraised value. The financing can be utilized for one asset or an entire portfolio. The investor provides the seller with a triple-net operating lease for a period of 10 to 25 years plus options so that the seller can continue to occupy the property. Initially, the seller/tenant usually pays the investor a negotiated annual rent equal to 6.5% to 12% of the contracted sale price. Investment grade corporations command a lower rate, while non-investment grade tenant command a higher rate. Because the rate is credit-driven, the real estate is considered to be additional collateral.

Small and large businesses alike can benefit from sale-leaseback financing; however, in the beginning, it was mostly chain businesses and national franchises that took advantage of the benefits of this financing vehicle. Many corporations across the country have employed sale-leaseback financing as a viable source to help finance mergers and acquisitions or leveraged buyouts. Many companies often use sale-leaseback financing as a way to eliminate long term debt obligations from their balance sheets and enhance liquidity. This effective financing vehicle also allows companies to fuel their growth while focusing on their core business operations.

The duration of the lease is negotiable, for a period of typically ten to twenty-five years.

A triple net lease is typically used. This form of lease allows the tenant to remain in complete control of the property under the lease provisions, while being responsible for property taxes, insurance and maintenance and expenses derived from occupying the property.

Sale-leaseback financing can be used for both existing and build-to-suit real estate. Regardless of the type of property you own, i.e. retail, office, industrial, educational buildings, health care, industrial facilities, service centers, distribution warehouses or fast-food establishments, you can fully benefit from clear advantages of sale-leaseback financing. Numerous privately and publicly held companies have employ this financing method successfully everyday.

Sale-leaseback financing is an important capital resource which is often overlooked. The attributes that this financing system provides, is all the more welcomed as spreads on traditional mortgage debt are widening. Given the instability of the securitized debt market, this financing vehicle makes a perfect alternative to traditional and non-traditional mortgages.