Human nature equips us with predisposition toward not rocking the boat rather than taking the road less travelled. However, as advisors, we understand that it is our job to help clients recognize weaknesses and see opportunities in their operations and financial circumstances. In a phrase, we are engaged to always remind our clients that “Great is simply not good enough.”
One such opportunity often involves how a company recognizes their physical assets of buildings, land and equipment on the balance sheet and how that will impact after-tax profitability. And while these considerations are of critical importance for sustainability, they must be carefully factored into long-term strategic ownership goals and objectives.
A successful company quite often sees the debt-free ownership of plant, equipment and corporate facilities as a sign of good financial health, but is it really? Is it possible that the cash that is locked up in those depreciating or slowly appreciating assets can be deployed into rapidly turning inventories or used to finance a growth strategy that significantly improves both operational profits and the balance sheet?
Typical alternatives to acquisition of existing or new facilities involves either substantial cash or debt; an increasingly popular solution for companies with good credit is the sale leaseback arrangement. Ask yourself why Walgreen’s owns almost none of their locations across the US. The same is true of Wal-Mart and many, many others including Fed Ex, etc. The reasons are different for every organization, but at the core, each of these has determined that their liquid resources earn a much higher rate of return in operations than they can anticipating any appreciation of the locations.
Most businesses are so busy monitoring and managing day-to-day operations that the opportunity to improve the balance sheet or unlock cash within the asset structure does not get attention. And that is where an advisor’s role is critical. It is your job and mine to raise the awareness of owners and management to these opportunities in such a way that they can first understand the opportunity and second make an informed decision with minimum risk to ongoing profitable operations.
Your clients want what every client wants…a straighforward, easily understood evaluation of how this strategy impacts their short term and long term business objectives.How much net cash would we generate from the sale?How can we retain complete control of the real estate?What does the impact on the balance sheet look like?Why is this preferable to arranging debt on the property?How does this look after-taxes?...and finally,Is this consistent with our long term goals of ownership?Are there any negatives, such as:How much capital gain will we owe?How do we avoid lease provisions that restrict us?Is it a negative not being able to sell the real estate with the business?What happens on lease expiration?How much does the property have to appreciate to make it preferable to keep on owning?What about the downside of vacating before lease expiration?
The CCIM institute has developed in their educational curriculum an Excel-based program that quickly and accurately answers all of these questions and quantifies the after-tax impacts of a proposed transaction from both the standpoint of the Owner/User/Seller of the real estate and the potential Investor. With a minimum of asset and current financial information, a confidential report can be generated to help the client move toward consideration of the sale leaseback solution. Of course, you will want to supplement this with your own evaluation, but this can provide a baseline of understanding for the client in an easily understood format.
Up to now, I’ve only talked about the world you and your client live in, but let’s not forget that the biggest reason for considering using a sale leaseback is in fact the current marketplace. If we could sum up all of the global economic issues into a single word, that word would probably be “credit.” And that is precisely why the sale leaseback investment is so popular today and how it really defines who is the most appropriate among your clients for this solution. I mentioned Walgreens, Lowe’s, Wal-Mart and Fed Ex earlier and clearly the credits attached to each of them makes them great candidates for this. You need to evaluate your stable of clients to see if there are existing, profitable and stable businesses whose balance sheets and operations can be improved by this. If so, we have the ability to quickly and economically provide an evaluation of your client’s real estate market value and how a potential sale leaseback might be structured in today’s market. Additionally, the analysis we provide will disclose all of the financial impacts on both operations (cash received after-tax) and balance sheet (asset and liabilities changes). It will also show the comparison results of continuing to own the property against the sale leaseback alternative.
My role is all of this is ultimately the broker who will bring about competition in the marketplace to obtain the most favorable sale of the asset to an investor willing to accept the terms of the Owner’s lease and disposition goals. That process begins with making sure we have clear objectives that can be accomplished in today’s market. Once we have that established, my role shifts to crafting the offering in such a way that it presents the investment “story” to the marketplace and generates the excitement necessary to meet or exceed the Owner’s expectations.I’ve been at this now for over 30 years and offer a significant list of testimonials of my effectiveness. You are in control of your clients’ futures and I offer myself and these tools to you as a resource to take your service to your clients to a new level.
“Is that real estate earning as much as those dollarscan make in my business?”
Property types that lend themselves to sale leasebacks are: • Freestanding single-occupancy buildings • Industrial warehouse/distribution • Research & Medical • Development facilities • Corporate offices • Most retail
Straightforward Evaluation of the OpportunityBenefits to Owner/User/Seller: Concerns for Owner/User/Seller: • Converts real estate asset to cash • Possible impact from capital gains • Retain control and utilization of property • Lease provisions too restrictive • Replaces book value with cash • Inability to sell the property with the business • Lease on balance sheet as footnote* • Inability to continue occupancy • Avoids costs of conventional debt financing • Loss of any future appreciation • Avoids debt on balance sheet as primary liability • Potential of vacating property early • Lease payments are tax deductible • An exit strategy for business & assets