5 Steps to Transacting a Sale-Leaseback

By Camille Renshaw, CCIM, Director, Stan Johnson Co.

Most company CEOs and CFOs understand the value and importance of managing real estate on the books to support an enterprise’s short- and long-term goals. Smart planning and appropriate consulting can help businesses take full advantage of real estate assets and opportunities presented to them. Working with the wrong advisors, however, can place companies in a vulnerable position to lose money on a transaction or not improve financial stability with each sale. The process of a sale leaseback can become chaotic quickly if a company is making decisions with anything less than expert guidance.

It is common for business executives to be unfamiliar with all the sale leaseback options available to them during periods of growth or transition. An unprepared company may approach a sale leaseback with minimal organization, underestimating how complicated the process can be. But the following easy steps for business leaders to follow ensure a sale leaseback that is fully optimized while limiting the chaos.

1. Pick appropriate advisors

Many companies may opt to work with local brokers that know what a sale leaseback is but do not have an extensive buyer network or in-depth expertise in the process. While the local broker can complete the transaction, the client may not achieve the highest value compared to if they worked with professionals that specialize in national sale leasebacks.

 

Selecting the wrong attorney, broker, or financial advisors can result in serious missteps throughout the process. A selling company’s goals and projections must match appropriately with the lease terms drafted by the broker.

 

2. Pitch the company a story

A major seller, such as Walgreens, has a rated credit that will make it easy to complete a successful sale leaseback quickly. The story is easy to tell.  Most middle market companies, however, are less well-known and must craft a compelling pitch to attract the best buyers in the market. If the company has encountered any financial obstacles during the last three years, this must be explained in the best light.

In order to engage the sale leaseback market, sellers are responsible for demonstrating the true earning power of their company to prospective buyers. To accomplish this, CEOs must determine the company’s EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs), which is the best indication of an enterprise’s financial performance and ongoing operations outside of real estate costs. 

3. Determine the value of the real estate

Vacant or user real estate can be more easily valued than property involved in a sale leaseback. Business leaders must conduct a balancing act between market rent, market lease comparables per square foot, and the desired asking price. Some companies may opt for maximum dollar when entering into a sale leaseback, while others could be in a position to benefit more from a lower rent and reduced sale price.

One key factor in sale leaseback real estate valuation is the selling company’s credit. Low risk credit can translate into a higher priced sale with lower rent. A company must understand how much rent it wants to pay and how much capital must be obtained through the sale leaseback.

4. Conduct the final interview process

After the sale leaseback advisor has helped a company determine the value of the transaction and how to approach the buyer market, more finite details can be finalized. Several lease instruments should be analyzed to ensure each clause and specification is designed with both the seller and buyer in mind. Business leaders must sign off on the lease structure being brought to market after taking into account several terms including:

-Length of lease

-Annual rent escalations

-Role of the consumer price index, if any

-Buyback options

-Insurance provisions

-Dispute provisions

5. Package the offer appropriately

The property has been valued and lease terms ironed out. Now CEOs must work collaboratively with sale leaseback advisors to create a real estate package that tells the story of the company and ensures all potential buyers know as much as possible about the enterprise and its leaders to encourage investment. Normal real estate packages focus on the physical property, while sale leaseback also includes a business overview that centers on introducing the executives, reporting on that industry sector, and telling the company story and trajectory.

Good advisors will ensure the final package is presented confidentially to the sale leaseback market and create a highly competitive bidding process.  Each potential buyer will take the time to consider the company and learn its business at the granular level before making a decision.

Case Study: American Forest Products

I recently worked on a sale leaseback for American Forest Products, which provides wood products to Home Depot. During the recession, AFP’s cash reserves dipped. Eventually, Home Depot, the company’s largest client, increased its orders as the economy started to pick up. AFP needed to expand its credit revolvers to meet the new demand, and therefore was a prime candidate for a sale leaseback transaction. In selling the property, AFP was able to generate capital to support an increased capacity, expand its market share and retain Home Depot as its prime customer.

I launched a rigorous marketing campaign that explained the company’s situation, the value of the industry and potential growth in the future.  I structured strong lease terms that ensured low risk to the seller, while attracting numerous competitive offers from sophisticated buyers specializing in the analysis of middle market credits. Under my guidance, AFP was able to sell five light manufacturing and distribution facilities and leased them back under a 21-year absolute net lease which included a predetermined buyback provision as a condition of sale.