Overview
The Rossi Investment Services Team has extensive experience negotiating Industrial, Office and Medical Office Sale-Leaseback transactions on behalf of corporate clients across the United States. Our team brings a combined 38 years’ experience advising clients on how to best maximize the value of their real estate. We have completed over $250M in Sale Leaseback Transactions in recent years.
What is a Sale-Leaseback?
The initial stage of an engagement with Colliers Sale-Leaseback Advisory Group is information gathering. During this stage in the process, our team will conduct a series of interviews and assemble information across a number of categories.
A sale-leaseback transaction allows corporate property owners to unlock the full value of their owned real estate assets while maintaining control and occupancy for a long period of time.
A sale-leaseback transaction is the process of selling a real estate asset or assets and simultaneously entering into a long-term lease agreement for the same property or properties. The seller receives the proceeds of the sale and becomes the lessee (tenant) under the new long-term lease agreement. The buyer funds the sale price and becomes the lessor (landlord).
There are many reasons for completing a sale-leaseback transaction. However, most are driven by the simple fact that operating businesses most efficiently grow by deploying capital into their businesses, as opposed to leaving untapped real estate equity on their balance sheets. Common business situations for sale-leaseback transactions include:
Funding expansion of an existing business or the acquisition of a complementary business.
Balance sheet enhancement by using real estate equity to pay down other corporate debt or repurchase stock.
Performing significant improvements to the facility that is the subject of the sale-leaseback without taking on additional debt. This could be a current or as-yet-acquired facility
Maximizing proceeds on the disposition or sale of an operating business.
Any other business activity for which the return on equity is believed to be greater than that of the subject real estate asset.
The Process
1. Information Gathering
The initial stage of an engagement with our team and also one of the most important, is information gathering. During this stage in the process, our team will conduct a series of interviews and assemble information across a number of categories. By focusing on assembling accurate and complete information up front, we wil avoid common issues and delays later in the process.
Property Information
We will begin by collecting all available information on the asset(s) to be included in the transaction including; floor plans, photos, architectural drawings, property condition reports, surveys, environmental studies, appraisals, capital improvement details, and title insurance policies.
Client Needs Analysis
Our team will conduct interviews with company leadership. We will discuss the short- and long-term facility needs of your organization. In some cases, our clients need property improvement or facility expansion capital to be included in the proceeds of the sale-leaseback transaction. Many buyers are open to funding these improvements as part of the sale-leaseback transaction.
Financial Details
We will require a minimum three years of historical company financial statements and two years of pro forma projections to help us advise your company on value. We will also review the terms and documentation of any debt collateralized by the subject properties.
Case-Specific Details
Certain properties and businesses have unique regulatory requirements or legal constraints relating to the transfer of property ownership. These circumstances will be discussed, and relevant documents are shared. Once this information has been gathered, we move to the Underwriting phase of the process.
3. Marketing & Gathering Offers
The third stage of the sale-leaseback process is the marketing of the Sale-Leaseback and subsequent gathering of offers. Our clients typically request that we solicit offers in one of two ways: an off-market, confidential basis; or, on a broadly-marketed basis.
Off-Market, Confidentially
We know, and have transacted with, the largest and most capable purchasers of sale-leaseback investments in the marketplace. These relationships, combined with our experience in accurately underwriting sale-leaseback transactions, can enable us to gather a sufficient number of offers to substantiate acceptance without publicly marketing the opportunity. Some of our clients prefer the discretion afforded by this marketing method.
Broad Marketing Campaign
We have the capacity, tools, and experience to broadly market the sale-leaseback offering to more than 15,000 prospective purchasers throughout the United States and abroad. This form of marketing can result in more offers than the confidential alternative, but not necessarily a higher number of attractive offers. That stated, some clients prefer that a transaction be marketed as broadly as possible to satisfy stakeholder concerns that “every stone be turned”.
Gathering of Offers and Buyer Evaluation
The timing for gathering offers is different with every transaction and depends upon a number or factors, including market demand, scheduling requirements, and flexibility in terms. However, we will typically establish a call offers date where all interested investors must submit their initial letters of intent to purchase the property(ies) to allow for the orderly evaluation of multiple offers with our clients. During this phase, it should also be expected that prescreened prospective counterparties will want to have informal conversations with key stakeholders and require a physical tour of the facility to conduct an initial property inspection.
2. Underwriting Analysis
The next stage of the sale-leaseback process is underwriting. During this stage, we will examine the collected information and develop a valuation range for the property, primarily based on three factors: creditworthiness, geography, and property condition.
Creditworthiness
Investors strongly consider credit risk when evaluating the default probability of a long-term lease. While it is certainly possible to for a company to complete a sale-leaseback transaction under financial stress, it will have a significant impact on the resulting valuation.
Geography
The location of the subject property is important for at least two reasons. First, the rent under the leaseback, and the resulting transaction value, will largely be driven by comparable properties in the local or regional market. Second, investors must consider the length of time that may be required to re-lease, or the ability to adaptively reuse, the property at the end of the lease term.
Property Condition
Investors must assume that they will take ownership of a property at the end of the lease that underpins the transaction. Therefore, the overall condition of the property, any deferred maintenance, and any environmental factors will be considered.
Considering these factors, and the needs gathered in the initial phase of the process, we will present and substantiate our opinion of the market value of the sale-leaseback. This value is usually presented as range dependent upon varying future rental payments and the length term of the leaseback.
Once the valuation is agreed upon, we will move on to marketing and gathering offers in the next phase of the process.
4. Negotiating & Closing
Review & Negotiation
The terms of all offers are compared to one another in an offer matrix and measured against transaction requirements. These terms typically include lease terms, sale price, timing of close, tax considerations, buyer characteristics and track record, closing contingencies, and other transaction-specific components. Following an “apples to apples” review of the offers, we work with our clients to negotiate the best possible final terms with the most suitable counterparty. These terms are outlined in a negotiated, non-binding letter of intent that will serve as a roadmap for drafting a formal contract.
- We will then conduct a best and final round with the top candidates where each prospective buyer will have to submit their best and final offers.
- We will work with our clients during the best and final stage to evaluate all offers and advise on the best candidate based on the following:
The terms, pricing and timing of each individual offer and how they help the clients goals.
Our teams experience with each buyer and their ability to close at the terms acceptable to our client.
Determining with the client which buyer will be the best partner moving forward as a Landlord.
Preparation of the Purchase and Sale and Lease Agreements
The terms of the letter of intent are used to create two binding documents: the purchase and sale agreement and the lease. The initial drafts of these documents are customarily drafted by the acquirer. We work with our clients’ legal representation to ensure that terms of these documents accurately reflect the specific terms and the spirit of the letter of intent.
Due Diligence Period
Every offer will be contingent upon some level of due diligence, customarily focused upon property condition and the financial condition of the seller. During the Information Gathering and Underwriting phases of the process, we pre-populate a data room with the majority of the information required for this due diligence with a goal of minimizing the document production effort during this due diligence period. A detailed property inspection will also occur, usually involving third-party consultants that evaluate the primary components of the building, to minimally include the roof, HVAC, structure, and environmental condition of the property.
Closing
Following a successful due diligence period and the satisfaction of any other contingencies, the transaction will move to closing. At the closing, the purchaser takes title to the property and pays the agreed upon purchase price. And, the seller starts their new, long-term lease of the property.