What is a Sale-Leaseback?
Many companies have a large part of their equity and debt tied up in their operational real estate assets. In a Sale-Leaseback, a company sells its real estate to a long-term investor and simultaneously enters into a long-term (15+ years) lease for the property sold. In doing so, the company extracts 100% of the property’s value and converts an otherwise illiquid asset into working capital to invest in its core business, while maintaining full operational control of the real estate.
A Sale-Leaseback needs a specialist long-term investor, as it is more like a long-term partnership. It is not the domain of normal real estate investors that maybe have 5 to 10 year horizons. PrimoRE can help access a variety of these capital sources depending on the specifics of the real estate typology, the underlying business and the dimension of both the deal size and the operating company.
Sale-Leaseback specialists look for long-term successful partnerships. Whilst in the US these investors dominate the real estate landscape for operational assets, In Italy, historically these investors have never been particularly active, this is down to two main reasons that have over time, ceased to remain true:
The first is that Finance Leases used to be the prevalent way for companies to finance operational assets, the tax advantages used to outweigh the concept that you could only cover say 70% of the value of the property.
The second was the tradition of "relationship" banking in Italy that meant that large successful companies were given access to liquidity by their banks even for non-core activities and at very attractive rates. In addition the relationship aided an embellished valuation such that 100% of the value of was extracted.
This landscape has now changed, Finance Leases are now out of fashion. For various structural and macro reasons Banks must make their loan book work harder. In addition, they have too many NPLs so will never again risk inflating values. On the flip-side, companies themselves want to keep their debt low and anchored to higher yielding core business activities.
Sale-Leaseback specialists tend to prefer companies in Italy that are either retail orientated or have a large component of their sales coming from exports. The operational asset definition is the key, as they can include production facilities which non-specialist investors would never consider.
Why a Sale-Leaseback?
Unlock the full 100% market value of otherwise illiquid real estate assets;
Reinvest the cash realized from the Sale-Leaseback into the core business operations that should yield better than real estate;
Retain full operational control of the real estate;
Benefit from 100% deductibility of rental payments rather than being subject to interest limitations for traditional debt as defined by tax laws.
Sale-Leasebacks are a good way to finance operations when debt is scarce and diluting equity is not an option. Traditional mortgage refinancing today may only release between 50% and 60% of the asset value, a Sale-Leaseback allows for the extraction of 100% of a property's value.
A company’s core business should have a higher yield than real estate. Therefore, by investing the proceeds of a Sale-Leaseback into the business, the return on capital improves and your company's equity works harder!
There may be tax arguments that support renting in favour of owning the space a company operates from. Firstly, rent is a tax deductible expense. Secondly, accounting practice requires core operational real estate to be kept at book value in the balance sheet, which can differ from market value.
Many SMEs in Italy traditionally moved their operational assets into a sort of family pension fund outside of the operational business. These families now understand that it is better to have that equity in diversified assets that are more liquid.
Sale-Leasebacks allow companies to maintain full operational control of the real estate. A Sale-Leaseback transaction can be structured in such a way that, with the exception of paying rent, it will have no impact on the company’s operations or long-term strategy. These transactions are subject to a careful due diligence to ensure key elements of the transaction such as rental level are market-proof, to the mutual, long-term benefit of both parties.
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