Sale & Lease Back of Property

September 22, 2010 at 3:39 pm

Raising finance by selling operational property during periods when borrowing is difficult can provide cash for expansion, takeover or additional working capital.

For most companies real estate is considered supportive but ancillary to the core business. Provided that the lease is drafted to provide appropriate control over the property most companies could lease rather than own the land and buildings used in their business.
A sale and leaseback usually takes the form of a sale of a freehold property to an investor, with the vendor taking an occupational lease in return for a capital payment.
However, occupiers should understand the strategic, financial and operational implications of what they are doing. Matters that are important to consider are timing, lease flexibility, accounting and tax issues, affordability and the financial cost involved.

Timing – is it right for the business and the commercial & industrial property cycle.

Strategy – Does it fit with the operational strategy and what is the planned investment route for the proceeds?

Affordability – can the business afford the ongoing rental stream and other costs under the proposed lease?

Accounting & Tax issues – not owning a property eliminates depreciation, and any gain from a sale is recognized as income and this may increase overall earnings to a company. Often a rent expense can be lower than the cost of amortizing mortgage debt and lease payments can be structured to achieve cash management goals.

Lease flexibility – leases should include a sufficient initial term as well as renewal options to insure the property will continue to be available for a company’s use. The form of lease used allows the company’s control, security and flexibility concerns to be satisfied.

From an investors viewpoint they are likely to view sale & leasebacks as a relatively safe investment option. This view will depend on the building quality and the tenant’s financial standing.

A registered valuer provides market rental and capital yield parameters advice which is invaluable in this process. It is important that an appropriate rental level is chosen so that a balance is achieved between the vendor and purchasers aspirations.

Morice is experienced in advising in this type of transaction. A recent example was a sale and leaseback opportunity in Takapau Road Waipukurau. Morice provided valuation advice on market rental levels and an appropriate capitalization yield to PGG Wrightson.

A sale and leaseback was agreed on a 9 year lease with rights of renewal at $132,506 pa with CPI rental growth increases at rent review. The property sold at auction in September 2009 for $1.7m reflecting an initial yield of 7.79%.

To discuss any of the above issues or to see whether a sale & leaseback transaction is suitable for your business or investment portfolio then call Simon or Brian at Morice on 06 835 3682 for a no obligation chat.

Entry filed under: Commercial/Industrial.

PCNZ/IPD New Zealand Property Index Rent Reviews & Lease Renewals


September 2010

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