Property Insights - further your understanding of real estate and finance

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

A business that needs a new factory, warehouse or headquarters faces a simple question: who pays for it? Funding the build yourself ties up capital in construction for a year or more, and then in owning the finished building for decades after. There is another option. Third party investors will fund, or commit to buy, a new building in exchange for a long lease from the business that will occupy it. The business gets a purpose-built facility; the investor gets a long term, se

IFRS 16 is the international accounting standard for leases. Since 2019 it has required a business to put almost every lease on its balance sheet — the right to use the building as an asset and the rent it has committed to pay as a liability. For a sale and leaseback, that ended the idea of ‘off-balance sheet’ property finance. It did not end the case for doing one. The reasons a business sells and leases back its property — releasing capital without borrowing or diluting own

1. Tell us about your current role and experience My name is Colin Elliot and I am the CFO of Pizza Express. As soon as I qualified as a chartered accountant I moved into investment banking, where I stayed for about 10 years, before returning to finance. I became a CFO in 2002 when I was appointed as the CFO of a small PE backed healthcare business running thirty odd care facilities across the UK. Since then, I have been the CFO of a series of companies across the Hospita

The most common objection to releasing capital from property is losing control of a building the business depends on. It is a reasonable concern and usually a solvable one — but only once a business is specific about which kind of control it is actually worried about, because they are not the same thing and different structures protect different ones. ‘Control’ gets used as a single word for at least three different things, and conflating them is why the conversation usuall

Not every business sale involves the transfer of real estate ownership. Many owners, particularly single-property SMEs, want to carve out the real estate, agree a lease with the operating business and retain as an investment post-sale. The result is an unusual dynamic, the party who has just sold the business becomes its landlord. The buyer's operating business needs continuity and the flexibility to run its operations whilst the new landlord wants to protect and grow the val

A lease in its basic form is a contract between a landlord and tenant. It sets out how much rent will be paid, for how long and what the obligations are on each party. In this article we will explore how different terms influence value – both from the investor (landlord) and business (tenant) perspective. Better understanding your counterparty helps both parties reach an amicable position quicker. How can it influence value so much? Two identical buildings let to the same b

Sale and leasebacks are viewed by some as a real estate exercise, evaluated in isolation from the rest of the capital stack. This view fails to realise the potential of sale and leaseback as a source of financing for the wider business. Its characteristics and cost ensure the tool can be a competitive source of financing and should be considered alongside traditional financing tools. Sale and leaseback vs. corporate financing (corporate bonds and private debt) The cost of fin

An Operating Company / Property Company (OpCo/PropCo) structure splits a business in two: an operating company that runs the trade and a property company that owns the buildings. The OpCo leases its premises from the PropCo and pays rent. Nothing changes operationally — the same business trades from the same sites — but the property now sits in a separate entity that can be financed, sold, or held independently. The central idea - a trading business and a property portfolio

The concept of the sale and leaseback originated in the US and continues to be dominated by capital from this jurisdiction. Its use has spread globally over the last few decades but the US market has led the world in turning this structure into a distinct institutional asset class. The ‘Net Lease’ market is named after the lease structure investors require, a ‘Triple Net Lease’, which results in all property related costs (namely tax, insurance and maintenance) being borne by

A forward fund is where an investor acquires a development site and pays for the building to be constructed, in stages, as the work progresses. The business that will occupy it agrees the lease terms up front, moves in on completion, and pays rent — without having funded the construction itself. The core benefit: a business gets a purpose-built facility specified to its own requirements, without the capital outlay of developing it or the debt needed to fund construction. Comm

Investors targeting sale and leaseback opportunities are not a single pool - many have differing requirements and priorities. A key difference which divides the market is whether the investor focuses their underwrite on credit or real estate. Credit investors price the strength of the tenant's covenant first and treat the property as secondary security; others are led by the asset - its specification, location, alternative uses and relettability. Profiles also vary based on t

A sale and leaseback makes sense in many situations but tends to be triggered by one of the following four scenarios: a business has capital tied up in property that would work harder somewhere else, it needs to raise money and would rather not take on debt or give away equity to do it, an exit from the business is planned, M&A where the business being acquired has real estate. These situations are all quite distinct as are their rationales. The first scenario is the mo

Sale and leaseback pricing is determined in part by covenant strength - an investor underwriting a long lease is pricing the certainty of receiving the rent. If investors perceive a heightened risk to that income stream, they will price it accordingly. Characteristics such as declining EBITDA, a covenant breach or a short-term debt maturity can all raise flags during their underwrite. The consequences aren’t limited to a wider yield, it can also narrow the buyer pool and intr

When a business with owned real estate changes hands, the buyer is acquiring two assets, an operating company and a property portfolio, but typically pays for them at a single multiple. The gap between what the real estate is worth through a sale and leaseback and what it contributes to the earnings multiple presents an opportunity for value creation. Please see Sale and Leaseback as a Tool for Value Creation for more detail. Before exiting, a seller needs to consider capturi

Sale and leaseback, secured lending, and equity all raise capital for a business — but they trade off very differently. Here's a high level overview on how to compare them. A business needing capital usually has three broad routes: borrow against an asset it owns, sell a share of the business, or sell the asset itself and lease it back. Each converts something different into cash, and each asks the business to give up something different in return. In our experience, busine

The same building can be worth two different amounts depending on who owns it. Sitting inside a portfolio company, it is included at the buyout multiple applied to the EBITDA it supports. Sold to a real estate investor and leased back, it is priced on a yield (the inverse of a multiple) reflecting the income profile. The sale and leaseback multiple is often materially higher than the multiple applied to the operating business. This gap is where sponsors can create value and e

Sale and leasebacks are a mechanism which can be deployed for different purposes at varying points in a sponsor’s hold period. They are a value creation tool but the proceeds also provide liquidity which can be deployed by Sponsors for a variety of uses. The question to be addressed is where in the hold period would a sale and leaseback process create the most value? Fund the acquisition The earliest and most direct use of a sale and leaseback is to provide funding for the ac

For a business monetising a building it owns, the biggest influences on value are not the ones people usually expect — and several of them have nothing to do with the property. The Basics There are some obvious aspects of commercial property that influence value and to some it is just location, location, location. In this article we will look at some of the principal points that impact on property value before looking in more detail at what influences investment properties –

Most sponsors adopt value creation routes such as operational improvements, financial engineering and strategic expansion. These methods are hands-on and time intensive. Whilst undertaking these methods, many are overlooking value which already exists on the balance sheet, tied up in a company’s owned real estate. How can real estate be used to create value? Real estate is held on balance sheet at book value or fair value, both of which are typically less than sale and leaseb