For many corporate occupiers, commercial property constitutes one of their largest operational assets. With a desire to improve shareholder value and efficiency and to refocus on core business, the continued necessity to retain such assets on the balance sheet is now under challenge. Changes in accountancy practice and a desire to maintain flexibility are, however making the choices ever more complicated. This paper examines the current options available for corporate users seeking to extract value from their property assets.

1. Simon Wainwright is a director of John
Peiser Wainwright, Property Investment Ad-
visers, based in London, UK. His practice
specialises in transacting investment business
throughout the UK and Europe. He advises
investors and corporate clients on sale-and-
leaseback programmes, the establishment of
limited partnership investment vehicles and
other off-balance-sheet structures. He is due to
launch www.offbalancesheetfinance.com, a
website specifically devoted to monitoring ac-
tivity and developments in this sector, later this
year. In the last two years, his company has
undertaken transactions with a total value in
excess of e500m.
ABSTRACT
For many corporate occupiers, commercial
property constitutes one of their largest
operational assets. With a desire to improve
shareholder value and efficiency and to refocus
on core business, the continued necessity to
retain such assets on the balance sheet is now
under challenge. Changes in accountancy
practice and a desire to maintain flexibility are,
however making the choices ever more compli-
cated. This paper examines the current options
available for corporate users seeking to extract
value from their property assets.
Keywords: accounts, balance sheet,
capital, divestment, lease, leaseback,
ownership, property
The decision by Microsoft, one of the
world’s most successful companies, to
pursue an exit strategy from the owner-
ship of its global real estate portfolio may
at first seem surprising. As with many
other corporate occupiers, though, the
rationale is straightforward: why have
shareholder capital tied up in non-core
assets when that capital can be more
usefully and successfully deployed finan-
cing the expansion of the company’s core
business, so achieving higher returns? The
fast pace of change and growth in the IT
sector makes it particularly difficult to tie
up capital for the long term in relatively
low-yielding illiquid assets. The principal
requirement is thus to preserve maximum
flexibility; the Microsoft programme has
sought to achieve this.
Many corporate occupiers lack a
business- and property-linked strategy, and
Off balance sheet property
ownership structures
Releasing capital from operational
portfolios through divestment
Simon Wainwright
Received (in revised form): 7th March, 2000
Simon Wainwright, Director, John Peiser Wainwright, 21–22 Grosvenor Street,
London W1X 9FE, UK; Tel: ϩ44 (0)20 7495 3728; Fax: ϩ44 (0)20 7495 3729;
e-mail: simon@jpw-investment.co.uk
Journal of Corporate Real Estate Volume 2 Number 4
Page 330
Journal of Corporate Real Estate
Vol. 2 No. 4, 2000, pp. 330–342.
᭧Henry Stewart Publications,
1463–001X

2. have created an optimum lease term of
10–15 years; flexibility can, however, be
maintained by the inclusion of tenant-
only break clauses.
When confronted by a request to
release the capital that is tied up in a
company’s commercial property assets,
Chief Financial Officers have historically
had two principal options: either to raise
debt against specific properties through
secured loans or mortgage debentures,
or to pursue a sale-and-leaseback pro-
gramme. Raising debt appears directly on
the company’s balance sheet and in-
creases gearing levels. To date, undertak-
ing a sale-and-leaseback programme has
neither of these disadvantages, hence the
popularity of this method. In many cases,
however, the capital raised through a sale
and leaseback has enhanced the balance
sheet at the expense of the profit and loss
account. The principal advantages and
disadvantages are summarised in Table 1.
against this background the ‘default’
strategy for property is to maintain
maximum flexibility. Flexibility, however,
comes at a price, and many occupiers seem
prepared to pay for a degree of flexibility
that they will never use. Conversely, those
occupiers opting for more inflexible
methods of occupation, such as the 25-year
lease, often have no exit strategy in the
event that their real estate needs change
over the lease period.
Most Chief Financial Officers are as
much concerned about the impact of an
operational property portfolio on the profit
and loss account as they are about reducing
its impact on the balance sheet. In this
context, reducing the amount of surplus
accommodation is of paramount con-
cern, as is reducing the impact of annual
depreciation charges. If anything, it is
these annual depreciation charges for fit-
ting-out costs that have limited the desire
to move towards shorter lease terms and
Wainwright
Page 331
Table 1: Secured lending versus sale and leaseback
Method Advantages Disadvantages
Secured lending/
mortgage debenture
Sale and leaseback
1. Retain capital allowances
2. Retain flexibility and control
3. Interest payments are tax
allowable against P&L account
4. Exposure to property market
capital growth
1. Off balance sheet
2. Rental liability is not capitalised
(at present)
3. Rental payments are tax
allowable against P&L account
4. Release 100% of value
5. No exposure to property market
capital risk — residual value etc
6. No amortisation
1. On balance sheet
2. Increases corporate gearing
levels
3. Release Ͻ100% of value
4. Need to provide for loan
amortisation over loan term
5. Exposure to property market
risk (residual capital value)
6. Capital tied up in an illiquid
asset
1. Loss of capital allowances
2. Loss of flexibility and control
3. Exposure to property market
risk (rental)
4. Rental liability may be
capitalised on the balance
sheet (proposed)
5. Loss of exposure to property
market growth (capital)

3. CONVENTIONAL METHODS
Secured lending or mortgage
debentures
The easiest way to raise capital from
operational property portfolios is to take
out a fixed-term loan, secured against
freehold property assets. Offering the
lender a first charge (either fixed or float-
ing) on the property lowers the cost of
borrowing, and this method preserves the
occupier’s flexibility, as the loan can be
repaid at any time, subject to break costs.
The owner retains the benefit of the
capital allowances, and the interest is
chargeable to the profit and loss account.
However, the owner will not release
100 per cent of the property’s value,
the owner retains an exposure to the
property market (capital value), and the
borrowings remain on the balance sheet,
thus adding to the company’s overall
gearing levels.
Secured property lending is extremely
competitive in the UK at present, with
many foreign banks actively seeking to
build a loan book in this sector. Margins
of less than 100 basis points (1 per cent)
are common, and loan-to-value ratios can
reach as much as 90 per cent in certain
circumstances. At the time of writing, the
yield curve is relatively ‘flat’, with the cost
of capital peaking at around the 3–5-year
mark; thereafter the yield curve ‘dips’ for
longer terms — see Figure 1.
The desire to limit the impact on the
balance sheet, and to release 100 per cent
of a property’s value, has persuaded many
corporate owners to pursue the second
alternative, the sale and leaseback.
Sale and leaseback programmes
In the last 12 or 18 months many major
companies have actively pursued sale and
leaseback programmes. Table 2 details
some of the more prominent transactions
in the UK, although, as will be considered
later, not all of these were on a con-
ventional basis, some being off balance
sheet.
What is perhaps surprising is the will-
ingness that many companies still ex-
hibit to enter into 25-year-plus operating
leases on leaseback properties, in the light
of recent changes in market practice,
the absence of a long-term business plan
Figure 1 Money
market fixed-rate
sterling yield curve
(June 2000)
Off balance sheet property ownership structures
Page 332
5.00%
5.20%
5.40%
5.60%
5.80%
6.00%
6.20%
6.40%
6.60%
6.80%
Base 3 5 7 10 15 20 25 30 40
Term (Years)
Rate

4. UK commercial property market, but
times have changed. The glut of commer-
cial property released on to the market
after the 1980s development boom left
occupiers in a strong position. In nego-
tiating new leases, many were able to
secure five- and ten-year break clauses;
15-year leases have now become the
norm in many sectors of the UK property
market.
The influx of American businesses into
Europe also assisted the campaign against
the 25-year FRI lease. American cor-
porate occupiers are already required to
note rental obligations under leases in
their accounts, and for this reason they
have been keen to obtain shorter lease
terms or early break clauses. Microsoft’s
leaseback of its offices in Dublin last year
is reputed to contain break clauses at the
fifth and seventh years of the lease term.
The author’s own company, John Peiser
Wainwright, was involved with the sale
and leaseback of Conoco’s UK head-
quarters some 18 months ago, which was
undertaken on a conventional basis but
and the proposed changes in Accounting
Standards.
The proposed changes in Accounting
Standards, which are still at the discussion
stage, propose to capitalise rental obliga-
tions under operating leases and include
them on the balance sheet as both an asset
and a corresponding liability. If these
proposals become established practice,
which is considered likely, many of the off
balance sheet advantages once afforded by
traditional property sale and leasebacks
will be removed. The capitalisation of
lease rental liabilities will increase cor-
porate gearing levels as much as retaining
ownership and raising mortgage debt. So,
are there any reasons to consider a sale
and leaseback? What is the rationale for
still undertaking such transactions? What
are the alternatives?
25-year occupational leases
For many years, the 25-year full repairing
and insuring (FRI) occupational lease,
incorporating five-year upward-only rent
reviews, has been the cornerstone of the
Wainwright
Page 333
Table 2: Recent UK sale-and-leaseback transactions
Company Size Yield Sector Location
Microsoft
Microsoft
Procter & Gamble
IBM
AXA Sun Life
Nissho Iwai
Dell
MFI
Conoco
WH Smith
Shell
Halifax
Holmes Place
J Sainsbury
BHS
Accor
£44m
£100m
£80m
£60m
£51.8m
£25m–£30m
£25m
£108m
£35m
£40m
£300m
£15.5m
£12.5m
£335m
£14.5m
£108m
7.0%
7.0%
6.5%
6.5%
6.0%
8.25%
7.2%
7.5%
7.25%
7.0%
7.0%
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Retail
Offices
Retail
Forecourts
Office
Leisure
Retail
Retail
Hotel
Dublin
Reading
Brooklands, Surrey
London SE1
Old Bailey, London EC4
London EC4
Bracknell Boulevard
10 stores
Warwick Technology Park
Portfolio — UK
180 petrol forecourts
London EC3
London suburbs
16 supermarkets
3 stores
London suburbs

5. contained a break clause at the twelfth
year of the term.
Many corporate occupiers, particularly
US corporations, are reorganising their
property portfolios on a pan-European
rather than a country-specific basis. In a
European context, leases in excess of ten
years are the exception rather than the
rule, and annual rental indexation is more
commonplace.
In the UK, the only sectors where the
25-year lease continues to be popular are
in the retail, hotel and leisure sectors. It is
the strong demand and limited supply of
new opportunities caused by a restric-
tive planning system that perpetuates this
situation in the UK. Yet even in these
sectors there are signs that occupier resis-
tance is emerging. In a series of recent
competitive tenders, it was noticeable that
David Lloyd Leisure were offering a max-
imum lease term of 15 years and compen-
sating by offering higher rental terms than
some of their competitors.
Many investors have recognised this
trend and are prepared to pay premium
prices for properties let on 25-year leases,
assisted by the lower cost of finance at this
end of the yield curve. The message is
thus clear: the days of the 25-year lease are
numbered. Against this background, let us
focus on the issues that are relevant to the
corporate occupier in extracting value
from corporate property assets.
ACCOUNTING STANDARD FRS-12
Provisions, contingent liabilities and
contingent assets
These provisions came into effect on
23rd March, 1999 and affect only those
leases that are considered to be liabilities
as opposed to assets. In practice, FRS-12
is most likely to affect leases where
the rental obligations are above current
market value (ie the buildings are over-
rented) and the tenant does not occupy
the buildings. The extent of the net
liability, including any potential dilapida-
tions claim, is capitalised in the accounts
on a present value basis. In practice, this
is merely an extension of the provisions
brought in during the mid-1980s, which
put an end to ‘finance leasing’.
While these provisions are sobering,
they do not at present make any impact
on sales and leasebacks at market rental
value. The proposal from the Account-
ing Standards Board is, however, that
all operating leases be treated the same,
and that the contracted rental stream is
capitalised and included on the balance
sheet as both an asset and a liability. An
operating lease is defined as any lease
that is not considered to be a finance
lease.
Thus, where a lease is at an open
market rental value, the minimum con-
tracted stream of rental payments for the
duration of the term, or to the next
break clause, is reduced to a present-
day value by discounted cash-flow tech-
niques, and this figure is included on the
balance sheet as a liability. Similarly,
where the property has a market value,
the capitalised value of the occupancy
rights under the lease (the rental value
of the property) can be included on the
balance sheet as a corresponding asset. In
the case of certain retail properties, the
lease may have a premium value over
and above its rental value (otherwise
known as ‘key money’), although oc-
cupiers would be unwise to include such
a sum on the balance sheet as an asset,
as such sums are notoriously uncertain,
variable and volatile.
While the sale and leaseback would still
release hidden capital, the principal ad-
vantage of this method is in the non-
recognition of the future rental liability on
a company’s balance sheet. If the Ac-
counting Standards Board’s provisions
Off balance sheet property ownership structures
Page 334

6. balance sheet until FRS-13 was adopted
in 1999.
Falling interest rates in the 1990s caused
substantial increases in property values.
Many companies were quick to revalue
property assets in their accounts. The fact
that the same property assets have been
financed through fixed-rate debt, which
has higher break costs due to falling
interest rates, has hitherto been ignored.
FRS-13 addresses this, requiring com-
panies to mark their loans to market and
to disclose any such liabilities on the
balance sheet.
So, what are the alternatives to secured
debt or mortgage debenture, or sale-and-
leaseback programmes? How can flexi-
bility be preserved, and debt removed
from the balance sheet?
OFF BALANCE SHEET VEHICLES
Accounting considerations
If a company owns 50 per cent or less of
the share capital of a subsidiary it does not
have to consolidate the liabilities of that
subsidiary on to the parent’s balance sheet.
If the parent owns 25 per cent or more of
the share capital of a subsidiary and exer-
cises a degree of control, a note of the
subsidiary’s liabilities still needs to appear
in the parent’s accounts, although these
are not consolidated on to the parent’s
balance sheet and will not affect its gear-
ing ratios. The current debate concerning
equity accounting may of course affect
this at some future date.
The possibility therefore currently ex-
ists for a corporate occupier to create a
holding vehicle, into which it transfers
its property assets. It can then gear or
leverage the subsidiary to the maximum
on a non-recourse basis, and, provided it
disposes of more than 50 per cent of the
equity, the debt need not be consolidated
on to the parent’s balance sheet.
are implemented this advantage would
be negated, although in most cases
the liability for rental payments would
be balanced by a corresponding as-
set value for the occupancy rights. In
these circumstances, there would be few
advantages to be obtained from a sale-
and-leaseback programme over releasing
capital through secured loans or mortgage
debentures, as each will have a similar
impact on the company’s disclosed levels
of indebtedness (‘gearing’).
It is worth pointing out that these
provisions do not in themselves alter the
operating efficiency of an affected busi-
ness, merely the basis of its financial
reporting. In determining the value and
worth of a given business, analysts should
already have accounted for, or discounted,
its operational property portfolio and its
costs or asset allocation. The provisions
may, however, flag up certain facts about
a business that were previously hidden,
particularly in relation to gearing levels;
in this context, retailers are most sig-
nificantly affected as the changes could
downgrade credit ratings and even render
companies in technical default of their
loan covenants.
ACCOUNTING STANDARD FRS-13
Disclosure of derivatives and other
financial instruments
Where companies seek to release hid-
den equity through a secured debt or
mortgage debenture programme they are
now subject to the provisions of FRS-13.
In structuring debt in this way, a bor-
rower will normally seek — and a lender
will normally require the borrower — to
control risk through the use of interest
rate derivatives. Regardless of whether
such derivatives were classified as an asset
or a liability (dependent on the move-
ment in interest rates, they remained off
Wainwright
Page 335

7. Simultaneously with the property trans-
fer to the holding vehicle, the corporate
occupier can lease back the properties
to its various operating subsidiaries. The
leaseback term could be for a term of, say,
15 years, with the possible inclusion of
break clauses. In this way, the operating
subsidiary can avoid the potential pitfalls
of having to capitalise long-term lease
liabilities. The downside of the shorter
lease, or the inclusion of breaks, is that the
value of the property will not be maxi-
mised and the borrowing and amortisation
costs will be higher, thus leading to higher
operating costs.
The prime motivation for restructuring
the balance sheet in this way is the desire
to release capital that is tied up in opera-
tional property assets and increase com-
petitiveness, not merely as a response
to changes in accountancy practice. A
secondary motivation is the desire to
achieve greater flexibility and agility in
response to the increased rate of change
experienced in many sectors, particularly
the IT sector.
Legal forms of co-ownership
What are the legal forms such co-owner-
ship vehicles can take? The principal
options are:
— Limited company
— Partnership (limited or general)
— Unit trusts (authorised or unauthor-
ised).
For off balance sheet co-ownership vehicles
to prove attractive to a wide variety of
investors, they should strive to achieve
tax neutrality and limited liability (limited
recourse) for all parties. It is for this reason
that the limited partnership structure is cur-
rently proving to be the most attractive
legal form for such co-ownership vehicles.
A Bill currently before Parliament should
introduce a further form of partnership,
the limited liability partnership, in 2001–02;
the difference between this and limited
partnerships is examined below.
LIMITED PARTNERSHIP
CO-OWNERSHIP VEHICLES
Limited partnerships: Tax efficiency
— limited liability — control
A limited partnership (LP) is in most cases
considered to be a collective investment
scheme. It is a long-established legal struc-
ture, dating back to 1907 in the UK, and
achieves both tax transparency and limited
liability for investors. Unlike a general
partnership, it has to be registered and
requires a Financial Services Act registered
manager.
One of the advantages of this structure is
that the corporate occupier can retain con-
trol of the investment vehicle, by setting up
a specific subsidiary company to act as
general partner, and appoint an independent
Asset Manager. This is particularly useful
where operational space is being shared
with income-generating space. Whether or
not the co-investor would be prepared to
accept such a potential conflict of interest
is of course another matter. In addition, if
the degree of control remaining with the
corporate occupier is the same as with
ownership, this could inadvertently bring
the structure back on balance sheet.
In contrast, if the corporate occupier
remains a limited partner, it is not permitted
to take part in the day-to-day running of
the partnership. A limited partnership can
also be structured to allow the corporate
occupier a re-purchase option after a fixed
period; provided this is merely a ‘call’ as
opposed to a ‘put’ option, it need not
appear on the balance sheet as a contingent
liability.
Through the impact of gearing or
leveraging, and by permitting access to a
number of investors, limited partnerships
Off balance sheet property ownership structures
Page 336

8. remain the preferred form of property
co-ownership vehicle.
Access to capital markets
In creating an off-balance-sheet structure,
corporate occupiers may also have the
advantage of being able to utilise the
capital markets to reduce the overall cost
of borrowing and thus to increase returns
on the equity remaining in an invest-
ment vehicle. The technique of issuing
bonds against the security of assets and
an income stream (otherwise known as
securitisation) is commonplace in other
industries and is starting to achieve ac-
ceptance and more widespread use in the
property markets. Again, the costs as-
sociated with this technique make it inap-
plicable to lot sizes below £100m; the
major advantage is access to cheaper capi-
tal and hence reduced operating costs.
Table 3 illustrates the way in which
structured finance works to provide
equity investors with enhanced returns. In
considering the ratios applicable, the key
consideration is the investor’s attitude to
risk, and the example in Table 3 is close
to the limit of what can be realistically
achieved through conventional finance. In
many cases, the bank providing debt
finance may also take an element of the
equity/mezzanine finance, and can make
an additional margin by securitising the
mortgages as part of a larger portfolio
by issuing commercial mortgage-backed
securities (CMBS). If the transaction is
do not suffer from capital size restrictions,
and can accommodate large as well as
diversified portfolios of property. In prac-
tice, they are unlikely to be viable for lot
sizes below £50m.
Limited liability partnerships — A new
vehicle
As limited partnerships date from 1907,
they are long overdue for an overhaul. A
Bill currently before Parliament should
introduce the limited liability partnership
(LLP) in 2001–02. This should overcome
the following drawbacks that limited
partnerships have suffered from, namely:
— LPs are limited to a maximum of 20
partners, whereas LLPs will have no
such restriction.
— LPs are barred from participating in
management, whereas there will be no
similar restriction on LLPs.
Final confirmation that LLPs will be tax
transparent is still awaited; however, for
a variety of reasons they are unlikely to
be suitable for listing. The property
industry has long campaigned for the
equivalent to a US-style real estate in-
vestment trust, and it remains to be seen
whether LLPs will provide this, by acci-
dent rather than design. For the time
being, it would appear that both LPs and
the new LLPs will be unsuitable for a
stock exchange listing, and until the
new Bill has been enacted the LP will
Wainwright
Page 337
Table 3: The gearing benefits of structured finance
Tranche/ratios Capital Interest/rent Interest rate/return
Senior debt
Mezzanine/equity
Property total
Loan-to-value ratio
Interest: Income cover
£90m
£10m
£100m
£6.3m
£1.2m
£7.5m
90%
119%
7.0%
12.0%
7.5%

9. sufficiently large and the time-scale per-
mits, the proceeds of the securitisation can
be introduced directly into the investment
vehicle, passing on the benefit of the
cheaper finance available through the
capital markets to the occupier.
Segmenting risk
One of the downsides of a sale-and-
leaseback transaction, from the occupier’s
perspective, is an exposure to potential
increases in the market rent every fifth
year of the term, at rent review. One
way around this is to structure fixed
rental increases throughout the term. This
eliminates this element of uncertainty for
the duration of the leaseback term and
gives both the occupier and the investors
greater cash-flow certainty. The investor is
thus purchasing a fixed-term cash flow,
together with the risk of an uncertain
residual value following the lease expiry.
The occupier will of course retain an
ultimate exposure to open market rents
upon the lease expiry.
A further approach that can be adopted
in the segmentation of risk is to sell on
this residual interest in the property
which follows the expiration of the
occupational lease to other investors, in
the form of zero dividend bonds. While
the potential upside in terms of future
residual value remains unlimited, the
downside of a fall in value can be
capped, by the use of residual value
insurance policies or guarantees. This
residual interest can of course be the
subject of an occupier’s right to repur-
chase at market value by either ‘put’ or
‘call’; it will be appreciated that a ‘put’
option may be classified as a contingent
liability on the balance sheet.
In these ways the various risks attached
to occupation and ownership can be seg-
mented, measured and controlled in order
to achieve a lower overall cost of capital
and hence lower operating costs.
Tax treatment
While offering tax transparency, the
limited partnership has a number of other
tax benefits and quirks. These relate
primarily to stamp duty and capital gains
tax, which are examined below.
Stamp Duty
It has been noticeable in the United
Kingdom property market that transaction
tax or stamp duty has increased sig-
nificantly since the Labour Government
took office. Stamp duty in the UK cur-
rently stands at 4.0 per cent for property
transactions that have a value in excess of
£500,000. This figure, combined with
legal and agents’ fees, gives rise to a
commonly quoted figure for ‘acquisition
costs’ of 5.7625 per cent.
In comparison with the level of transac-
tion taxes elsewhere in Europe, the level
applicable in the UK is still quite low, as
Table 4 demonstrates.
In contrast to the transaction tax on
property (4.0 per cent), the transaction tax
on share transfers is 0.5 per cent. There is
therefore a movement in the UK to
ensure that property assets are held in
a more liquid form or in more liq-
uid vehicles. One of the side effects of
moving corporate assets into off balance
Off balance sheet property ownership structures
Page 338
Table 4: Transfer taxes in Europe
Country Transfer tax %
Belgium
France
Germany
Italy
Spain
Sweden
The Netherlands
United Kingdom
12.5
4.8*
3.5
10.0
6.0
3.0
6.0
4.0
*Note: France was 18.6% until January 1999

10. partner no longer owns. The downside of
this is that a capital gains tax liability
can arise for existing partners each time
either a new partner joins or an existing
partner leaves, where their share percent-
ages change as a result. If the profit-
sharing ratios do not change, the impact
of capital gains on the remaining partners
should remain unaltered.
As the use of limited partnerships as
property investment vehicles has only
recently become more popular, many
tax-related issues have yet to be con-
sidered in depth by the Revenue.
Income
Each partner is taxable on its share of the
income or gains arising from a partner-
ship in a given year. Due to the tax-
transparent nature of partnerships, gross
taxpayers such as pension funds are not
prejudiced by the tax obligations of other
partners. As there would be no benefit for
a corporate occupier to pay rent to itself,
the objective of structuring a limited
partnership must be to obtain maximum
leveraging in order to minimise any surplus
income after debt service and amortisa-
tion.
CASE STUDY: PROJECT REDWING
J Sainsbury plc and Highbury Finance
The retail sector has been at the forefront
of the move towards property divestment
programmes. J Sainsbury plc announced
the intention to set up such a vehicle,
codenamed Project Redwing, in October
1999 and successfully concluded a transac-
tion in March 2000. The deal involves
many of the techniques discussed in this
paper and was structured as follows:
— The transaction involved the sale of a
portfolio of 16 stores to an offshore
special project vehicle (SPV) and raised
sheet structures is the potential to save
future stamp duty when divesting from
the equity in such ownership vehicles. It
should, however, be stressed that limited
partnerships do not have any potential for
a stock exchange listing, and the secon-
dary market in partnership shares can be
both limited and illiquid.
The disparity between property and
corporate transaction taxes, together with
avoidance mechanisms, is something that
is currently under investigation by the
Revenue. For the time being, savings
would appear to be achievable, provided
the purpose of the entire structure cannot
be shown to be stamp duty avoidance.
It is possible that any changes in respect
of stamp duty legislation will relate to
transfers taking place through corporate
vehicles within the UK. Ways are still
likely to exist which mitigate stamp duty
liabilities though the use of offshore
vehicles and by dividing ownership be-
tween its legal and beneficial interests. For
a multinational corporate occupier pursu-
ing a global or pan-European approach to
its property assets, many possibilities exist
as to the country of domicile for its
property-holding vehicle.
Capital Allowances
The position concerning capital al-
lowances in limited partnerships is
uncertain, and is still open to interpreta-
tion by the Revenue. It should, however,
be possible to make a case for a 50 per
cent owner to claim 50 per cent of the
available capital allowances on property
assets on a ‘pass-through’ basis.
Capital Gains
In terms of tax considerations, where a
new partner joins or leaves a partnership
and causes a change in partnership profit-
sharing ratios, the Revenue treats each
partner as having disposed of the fractional
part of the partnership assets which that
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11. Off balance sheet property ownership structures
Page 340
Table 5: Retailers: Land values and capitalisation compared
Company
Land and
property value
£m
Market
capitalisation
£m Ratio %
Tesco
Kingfisher
Dixon Group
Marks & Spencer
J Sainsbury
Boots
Great Universal Stores
Safeway (UK)
Morrison (WM)
Next
Matalan
Signet Group
WH Smith Group
N Brown Group
Debenhams
JJB Sports
Iceland Group
Somerfield
Selfridges
DFS Furniture
Brown & Jackson
Carpetright
T&S Stores
Body Shop International
Greggs
MFI Furniture
Storehouse
Courts
New Look
Wickes
Clinton Cards
Wyevale Garden Centres
Arcadia Group
Fine Art Development
House of Fraser
Thorntons
Allders
Harvey Furnishings
Blacks Leisure
Budgens
Grampian Holdings
Moss Bros Group
Alldays
Save Group
6,030
2,060
73
2,670
5,000
854
313
3,080
1,050
88
15
49
189
14
506
18
252
819
292
43
45
38
24
43
41
356
412
106
23
34
15
104
352
31
273
40
86
19
23
64
49
15
77
195
12,440
8,180
7,110
6,950
6,200
5,460
3,540
2,020
1,940
1,910
1,110
1,050
993
932
669
642
478
416
354
348
340
339
275
259
234
232
227
222
220
207
195
191
176
156
134
126
108
104
101
100
99
79
31
27
48
25
1
38
81
16
9
152
54
5
1
5
19
2
76
3
53
197
82
12
13
11
9
17
18
153
181
48
10
16
8
54
200
20
204
32
80
18
23
64
49
19
248
722
Source: The Times 4th December, 1999; Datastream

12. historically comprised, as much as 96
per cent of the company’s net book
value. Table 5 highlights the issue of on
balance sheet property assets across the
retail sector and indicates the vulnerability
of many of these companies, unless this
issue is addressed. The one caveat is that
many of the figures provided in company
reports and accounts are historic and may
be wildly optimistic, thus overstating the
position.
CONCLUSIONS
The drive towards the more efficient use
of capital is on, with most companies
focusing on their core business. In this
context, the necessity to retain operational
property on the balance sheet is the
subject of much debate. Retailers whose
property portfolios represent a significant
proportion of their market capitalisa-
tion have realised their vulnerability to
predators anxious to unlock latent value.
The simple choice between on and off
balance sheet finance is now complicated
by the proposed changes in accounting
standards. Against this background, con-
ventional sale-and-leaseback transactions
are metamorphosing into complex struc-
tured finance deals; J Sainsbury’s Project
Redwing with Highbury Finance can be
seen as a vanguard, with many other
retailers looking to follow suit.
Not everybody agrees that this is the way
forward; previous transactions, such as the
Tesco/British Land venture, have encoun-
tered difficulties. Some argue that with
borrowing costs at a 30-year low it is better
to preserve total flexibility, to retain owner-
ship and opt for on balance sheet debt,
provided gearing levels are not an issue. If capital
is an issue, then it is important to assess
priorities and balance short-term needs
against the long-term commitments of sale-
and-leaseback transactions.
£340m.
— The funds raised will be utilised by
J Sainsbury plc to develop new
Homebase stores and to finance the
retailer’s e-commerce plans (core busi-
ness).
— The leaseback to J Sainsbury plc is for
a term of 23 years.
— The leaseback rent of approximately
£25m per annum equates to £254 per
sq m (£23.60 per sq ft) and is not
subject to open market rent reviews
but rather to an annual indexation of 1
per cent per annum, giving a fixed
income stream.
— The acquisition was largely financed by
issuing fixed-interest bonds offering a 7
per cent coupon. As the SPV issuing
the bonds is offshore, payments un-
der the bonds are more tax efficient,
reducing the cost of capital. The bonds
are partially self-amortising, and the
debt falls from £340m to £170m at
the end of the 23-year term.
— While 16 stores are pledged as security
for the bonds, a further nine pre-
agreed stores have been agreed as
suitable substitutes, in the event that J
Sainsbury plc need to sell or redevelop
any of the original 16 properties at any
time during the first 21 years, subject
to a valuation test.
— At the end of the 23-year term, the
outstanding debt of £170m will be
financed through the sale of the stores.
J Sainsbury plc has a first option to
acquire the stores at market value. J
Sainsbury plc has guaranteed to under-
write any loss if the properties fail to
achieve a sale price of £170m and will
share in any excess profit above the level
required to repay the bonds. Alterna-
tively, J Sainsbury plc can take a new
20-year lease on the properties.
The deal is important for J Sainsbury plc,
whose property assets it is estimated have
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Page 341

13. What is clear is that those organisations
that have a linked business and property
strategy will have a clear competitive ad-
vantage over those that do not. Those
organisations that have achieved this will
know where to pay for flexibility; those
without a linked strategy may pay for
flexibility but never use it. The operational
costs of those organisations without the
linked strategy will therefore be higher than
those with an occupational plan; in the long
run, they will be less competitive.
With most major corporations review-
ing their occupational property require-
ments, the difference between the US and
Europe is relevant: it is estimated that in
the US corporate occupiers own around
18 per cent of the property they occupy,
whereas in Europe the figure is closer to
70 per cent. For the large quantities of
capital seeking suitable investment-grade
stock across Europe, the outsourcing
of operational corporate property assets
seems their natural quarry.
The J Sainsbury deal would appear from
the occupier’s perspective to be a case of
‘having your cake and eating it’. If so, it
is likely that we will see many variants
of this transaction in the months ahead.
Such transactions are still in their infancy,
and many Chief Financial Officers will be
watching developments with interest.
Off balance sheet property ownership structures
Page 342