Different ways a business can release value from property

Owned property is often one of the largest sources of untapped capital on the balance sheet of a business. New buildings can also absorb capital that would create more value elsewhere in the business.

There are more ways to release that value than most businesses realise. If we include capital brought in to fund new development — in effect, releasing capital before it is ever tied up — there are at least ten distinct routes. They range from a simple sale of a building you no longer need to sophisticated structures backed by insurance capital.

In this article we will outline each of them, group them into five families, and explain what separates one from another.

The ten routes at a glance

The routes fall into five families. Some release capital from buildings a business already owns, others fund new buildings, and some do both. The simpler routes are open to most businesses; the more sophisticated ones generally need a strong or investment grade covenant.

The basics

1. Vacant possession sale. The simplest route: sell a building the business no longer needs and use the proceeds as working capital. It also removes the running costs of a surplus site. It raises the least capital of any option, because the building is valued empty, and is usually a tactical response to surplus space rather than a strategic financial release. A short-term leaseback while you vacate is often possible. See A Comparison of Different Types of Property Value.

2. Sale and leaseback. The business sells a property it needs and immediately leases it back, typically for 15 years or more. It keeps full control of the building and maintains its obligations to repair etc. This usually raises more capital than a vacant possession sale or property-backed debt. It suits mission-critical sites and can be highly dependent on the covenant quality on the lease. See What Is a Sale and Leaseback?

Variations

3. Credit tenant lease (CTL). A very long lease — typically 30 years or more — priced mainly on the strength of the business rather than the building. An investor provides capital up front in exchange for a bond-like stream of rent, and may be structured without transferring the property to the external investor. It typically attracts the lowest cost of capital, but requires a very long commitment and is more complex to structure. It is generally reserved for investment grade (or equivalent) businesses.

4. Income strip. A close relative of the CTL. The business sells the freehold to a long-term investor, often a pension fund or insurer, and leases it back for a very long term with regular, usually inflation-linked, rent increases. At the end of the lease the business buys the property back for a nominal sum, typically £1. It can be used for existing buildings and new development.

Funding new development

5. Forward fund. An investor buys the site and pays for a new building in stages as it is built. The business agrees a long lease up front and moves in on completion, without using its own capital for construction. See What Is a Forward Fund?

6. Forward commitment. An investor agrees to buy the new building at a fixed price on completion. The business funds and controls the build, then sells and leases it back. It gives certainty of the exit price but no upside if values rise, and the business carries the cost of construction until completion.

Sophisticated products

7. Insurance-backed capital. Capital raising products funded by insurers rather than traditional property investors. They can deliver equity-like and reduced balance sheet treatment for the capital raised. They are highly complex and need significant scale, so they suit large portfolios with a specific accounting aim.

8. Synthetic lease. A bespoke financing structure designed to minimise the balance sheet impact of raising capital, whether against an existing building or to fund a new building or acquisition. The lease is shorter, typically around five years, with options at the end, but the minimum size is around £50m and the business carries refinancing risk. They are more common in the US; under IFRS 16 the accounting benefit needs checking case by case.

Debt

9. Asset-backed finance. Borrowing secured against the property, from senior debt through to mezzanine. The business keeps ownership and any future growth in value, but lenders typically advance only a proportion of the property’s value, and the loan must be repaid or refinanced. See How Does a Sale and Leaseback Compare to Secured Lending or Equity?

10. Debt ground rent. Very long-dated debt, typically 45 years or more, with no transfer of the title. The business keeps ownership and control of the property, while the funder receives a long, secure income that it treats much like a bond. The trade-off is a very long-term commitment.

How do you choose between them?

Four questions narrow the field quickly:

1.       Do you still need the building? If not, a vacant possession sale is simplest.

If you do, you need a route that lets you stay in occupation. See When Would You Do a Sale and Leaseback?

2.       Is the building existing or yet to be built? Forward funds and forward commitments are designed for new development; most other routes work on existing property, and some work on both.

3.       How strong is the business’s covenant? Vacant possession sales, sale and leasebacks, forward funding and secured debt are open to most businesses. Credit tenant leases, synthetic leases and insurance-backed products generally need an investment grade (or equivalent) covenant.

4.       What matters most: capital, cost, control or the accounts? The routes that raise the most capital are not always the cheapest, and the accounting outcome differs by structure. See What Is IFRS 16 and What Does It Mean for a Sale and Leaseback?

What this means for a business

There is rarely a single right answer. A business with several properties may use different routes for different buildings — selling what it no longer needs, leasing back what it does, and forward funding what it is about to build.

The structure should follow the business plan, not the other way round. Operational needs, the quality of the property, the accounting impact and what investors will pay all shape the right answer. The lease terms agreed will then drive the value achieved; see How Do Lease Terms Influence Value?

The final word

Owned property does not have to sit idle on the balance sheet, and new buildings do not have to be funded from the business’s own capital. The ten routes above cover everything from a straightforward sale to highly structured products. The earlier a business looks at its options, the more of them remain open.

Speak to Capcore if you would like to understand which routes are available for your property. We would be happy to have a no-obligation discussion.