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

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

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

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

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

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

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

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

The decision to release capital via a sale and leaseback should not risk the future exit from a portfolio company. To mitigate this risk, it is important to ensure the rent is sustainable and the lease terms are market-standard but three lease provisions should be a top priority for Sponsors as they pose the largest potential risk for an exit: lease length, change of control and assignment/subletting. Lease length and break options: pricing today vs flexibility tomorrow Inves