Buffer Employee Stock Ownership Plans With A Sale Leaseback

Many employers that operate employee stock ownership plans or ESOPs may be growing anxious about their balance sheet reserves.
It is a sign of the times. Economic forces rocking today’s market range from rapid inflation to bank failures, industry downsizing and rising interest rates. Conditions like these can lead to a surge of employee departures, triggering an ESOP provider’s obligation to buy back the shares of exiting workers.

An employer may already be burning through its reserves by repurchasing shares, or may simply be looking for a source of low-cost funding to shore up its balance sheet as a safeguard against future needs. For those companies that own real estate, a sale leaseback may offer the best solution to meet their capital requirements.

ESOPs in a nutshell

Most business owners that operate an ESOP will already be familiar with the major advantages and responsibilities associated with this type of employee benefit program. As the name suggests, ESOPs allow employees to receive ownership shares as a form of deferred compensation.

The framework for ESOPs originated under the Employee Retirement Income Security Act in 1974, and the government went on to tweak the structure and its tax benefits for more than a decade. Proponents of the strategy have applauded it as a vehicle to compensate employees with broadly shared ownership while simultaneously aligning team members behind a common goal of helping the organization succeed.

As previously mentioned, however, ESOPs come with a repurchasing obligation, and plan operators are required to keep a capital reserve on hand to buy back shares when participant employees leave the organization. At a time when those departures are happening more often than normal, a company may be searching for an efficient way to restock its balance sheet. Alternatively, an organization may desire funds to invest and create an additional income stream, which it can use to keep its reserves at a target level. In either case, a sale leaseback may provide a highly efficient means to fund those efforts.

Sale Leaseback Opportunities

An ESOP sponsor that owns real estate can use a sale leaseback transaction to access the previously illiquid equity built up in its property. A sale leaseback advisor will be able to source potential buyers for the real estate and structure lease terms that ensure the business locks in long-term property access. This allows continued operations in the space at a predictable occupancy cost.

In return for the leased property, the seller receives sale proceeds that are often substantial. Tapping real estate equity through a sale leaseback is gaining popularity as an alternative to debt financing, which has grown costlier with the Federal Reserve’s series of moves to raise interest rates and curtail inflation.

To explore how one or more sale leaseback transactions can optimize your company’s balance sheet to better support an ESOP program or meet other objectives, contact us for a consultation.