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Exit strategy

Kevin Annis

When evaluating a commercial real estate purchase it is important to evaluate three basic factors.

First is your initial purchase price. Are you priced within market standards based upon current market trends? How much initial cash flow are you able to provide?

Second, it is important to evaluate your cash flow over the term of the loan. What kind of financing are you able to obtain, what tax benefits are you getting from ownership, and how do the payments of the mortgage relate to the potential lease revenues?

Finally, you must evaluate the eventual disposition of the property. How much will certain buildings and projects appreciate over the term of your ownership? When is the right time to sell? How can you maximize the sales price of your building?

As credit gets tighter and traditional financing channels dry up, both large and small businesses become more creative in looking at alternatives for capital funding. Converting real estate assets to cash is a time-honored technique used by major corporations holding buildings not essential to their core operations.

In today’s ever-changing real estate landscape it is important to keep up with the trends to take advantage of opportunities therein. If you are the owner of an office building. you no doubt are concerned with the local office market. It may make sense for you to own your building for the term of your occupancy, but how can you maximize your sales price and building value when you want to sell? One potential opportunity to achieve maximum dollar value for your building and provide an exit strategy is a sale and leaseback.

A sale-and-leaseback real estate transaction takes place when a business owner owns the real estate his or her company occupies. He or she then sells the real estate portion to a third party while simultaneously entering into a lease and continuing to occupy the property. In return, the investor agrees to pay a premium for the fully leased investment. While the fundamentals of the sale-leaseback are fairly basic, there are numerous intricacies that must be taken into account.

From the seller’s prospective, he or she will get the benefit of upfront capital for non-earning assets, thus improving the organization’s financial situation. The seller also is alleviated from the burden of managing the property and can focus on operating the business. The proceeds from a sale-leaseback can provide the funds for a necessary expansion, paying off outstanding debt, or repurchasing corporate stock. From a profitability standpoint, it can reduce a company’s debt-to equity ratio and reduce interest and depreciation expenses.

Owning real estate can be an arduous task, one most business owners aren’t interested in. Therefore it may make more sense to use the corporate funds towards the company’s core business. Entering into a sale-leaseback allows business owners to focus their resources on what they do best.

The buyer, meanwhile, gets the benefit of a fully leased building and mitigation of leasing risk factors. A buyer investing in a sale-leaseback will be looking to invest in long-term, low-risk investments with an outlook for guaranteed rents and anticipated appreciation.

Two important considerations are the sale price of the property and the agreed terms of the lease. When an investor purchases the building, the price of the building will be based upon several key market indicators such as an appropriate capitalization rate of the current market rents and a per square foot cost. Typically, both buyer and seller will want to discuss with an appraiser or commercial real estate professional concerning both of these variables.

With markets tightening and capital becoming increasingly more difficult to obtain, this could be the most optimal time to dispose of your real estate. Prior to any disposition, all parties must consider the business and tax advantages, disadvantages, and risks involved in this type of arrangement before moving forward. While this may not be for all building owners, this is one attractive alternative to maximize your final sales price.

So, if you are looking to unlock capital tied up in non-income producing real estate assets to fuel growth, improve your return on capital, strengthen your balance sheet or achieve greater financial flexibility, a sale and leaseback may be for you. Contact your trusted commercial real estate advisor to structure a sale-leaseback transaction that will unlock that capital, increase your flexibility, improve your operating efficiency, and maximize the value of your commercial real estate asset.

Kevin Annis is a licensed commercial real estate advisor focusing on sales, leasing, and investments for TD Realty Advisors/ Tanamera Development. Contact him at 850-4200 or kannis@tdnev.com.


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