Sale-Leasebacks: Easing the Credit Crunch
With the availability of capital squeezed by the global credit crunch, corporate facility sale-leasebacks are emerging as an increasingly large component of real estate investment sales worldwide.
The global credit crunch has had wide-ranging effects on many international markets, in some instances shrinking the availability of capital not only for corporate growth, but also for refinancing existing corporate debt.
As a result, corporate facility sale-leasebacks are emerging as an increasingly large component of real estate investment sales worldwide. Sale-leasebacks, wherein an owner-occupier sells a property to an investor while maintaining occupancy through a lease, allow corporations to raise precious capital; it can often provide sellers with an immediate, positive earnings impact. Sale-leasebacks also offer corporate owner-occupiers the added benefit of removing the non-earning asset from the balance sheet and transferring the long-term disposition risk to a new owner-investor.
Globally, there were about $88 billion worth of global corporate dispositions in 2007-representing more than 10% of the total $817 billion in investment sales for the year. Of that $88 billion, $56 billion were in corporate sale-leasebacks. In 2007, the volume of U.S. corporate sale-leasebacks was approximately $13.5 billion or about 15% of all global corporate dispositions.
Sale-leasebacks have a stable cash flow via leases that usually last 10 years or more and often cover ongoing capital repairs and maintenance during the lease term. Those benefits stand in contrast to multi-tenant buildings in which tenant rollover and near-term vacancies create uncertainty around income from the property.
Sale-leasebacks can be structured to fit a corporation’s strategic goals. For example, Jones Lang LaSalle recently represented a major technology firm that downsized its space requirements on its 1 million-square-foot campus (while holding development rights for an additional 450,000 square feet). The firm’s main goal was to redeploy capital from owned real estate to core business functions by monetizing assets, reducing its occupied footprint and realizing the value of the undeveloped parcels.
Through a broad capital markets and investor marketing campaign, the firm was able to sell and lease back the occupied buildings at market rents, for varying terms and with long-term renewal control rights. In addition, the central plant and amenities center were sold off, with the required proportion to serve the client’s needs licensed back. The buyer received a stable yield from the long-term leased facilities as well as the upside potential of developing additional buildings to lease or sell to other tenants.
As a result of this sale-leaseback, the seller was able to reduce its occupancy cost, eliminate the non-earning asset from the balance sheet, enhance operating flexibility through the various lease terms and redeploy capital back into its core business.
In Europe, where companies have been extremely reluctant to sell property-particularly headquarters facilities-the dramatic growth of sale- leasebacks represents a marked shift in attitudes. During the past five years, the European real estate market has been characterized by investment volumes and capital values at record levels and leasing markets with sustained demand and strong rental growth. Against this booming backdrop, corporate occupier activity in the capital markets has emerged as a key feature of this market.
Outlook for 2009
In the coming years, there will be more mandates in the United States and for U.S. multi-national companies for disposition of surplus real estate. The pressure to cut additional costs will be huge. With real estate capital still more attractive compared to general unsecured corporate debt, corporate sale-leasebacks will assume an increased slice of the investment pie.
Most European markets will see rental growth, but at a far decreased rate to that witnessed in 2007. Globally, the “own vs. lease” question being asked with increasing frequency by ever more informed executives. As a result, we will continue to see increased activity in corporate sale- leasebacks throughout the globe and especially in the U.S. As our economy as a whole continues to make strides towards correction, sale-leasebacks generally offer security for the investor to structure favorable debt terms as part of an acquisition. And sale-leasebacks offer corporations the opportunity not only to rebalance the lease vs. own equation in their portfolios, but also to use sale-leasebacks as an alternative source of reasonably priced capital.
Kenneth Rudy is managing director of Jones Lang LaSalle’s Corporate Capital Markets group. He is responsible for developing and executing financial strategies, which incorporate occupancy and financial objectives for the firm’s strategic alliance and major occupier clients. He has more than 24 years of experience in real estate and holds a bachelor’s degree in finance from the University of Texas and a Master of Management degree from Northwestern University’s Kellogg Graduate School of Management. He serves on Jones Lang LaSalle’s Americas Corporate Solutions Board, the Public Institutions Advisory Board and the Global Capital Markets Board.