Introduction
Navigating the complexities of sale leaseback transactions demands a strategic collaboration among various groups. This article explores the critical roles of each participant in the process, and why engaging experienced advisors is vital to achieving a successful outcome.
The Sale Leaseback Transaction Village
- Seller
Private equity firms and owner-operator businesses initiate sale leaseback transactions to unlock real estate value at attractive multiples, while maintaining operational control of the business. Whether the seller is an operating company, portfolio company, or a private equity firm, this party is responsible for engaging an advisor to work on their behalf from the earliest stages of underwriting through closing of the transaction.
- Buyer
Sale leaseback investors including private buyers and public investors are brought into an opportunity during the marketing process. The buyer will scrutinize several streams of information when analyzing a potential transaction. They focus on the financial health of the seller/tenant, examining their creditworthiness, financials, balance sheet, historical stability, and operational performance. They will also assess the strength of the real estate, taking into account various fundamentals as well as the overall market including sales and rent comparables. Buyers will also pay attention to the offered lease terms as buyers assess the length of term, rental rate, escalation clauses, and any special provisions within the lease agreement. Buyers also might choose to engage a capital markets advisor to get a better understanding of their specific debt requirements so that they can model up their returns. Overall, sale leaseback buyers take a comprehensive view of an opportunity incorporating financial, legal, and property-specific details to make informed decisions regarding the transaction's viability and potential return on their investment.
- Legal Counsel
Sound legal representation is foundational to a successful sale leaseback. Buyer and seller will each engage their respective counsels to navigate the legal landscape, ensuring efficient negotiations and watertight purchase and sale agreements and lease contracts. Legal counsel will also review due diligence documentation including title policies. The role of legal counsel effectively mitigates risks and facilitates a smooth transition of ownership and future relationship between the tenant and landlord.
- Tax and Accounting Advisors
Tax advisors play a crucial role in the seller's due diligence process by examining the potential tax implications of the sale. They assess the seller's tax position, identifying potential capital gains tax liabilities, transfer tax potential, and opportunities for tax structure optimization. Tax advisors also explore strategies to minimize tax liabilities arising from the sale, such as utilizing exemptions or structuring the transaction in a tax-efficient manner. Their expertise ensures that sellers understand the tax consequences of the sale and can make informed decisions to maximize their after-tax proceeds from the transaction. Accounting advisors ensure that the proper accounting treatment is achieved based on the agreed upon lease. Accounting advisors may recommend certain language for various lease provisions in order to maintain that proper accounting treatment will be upheld.
- On-Site Contacts
Site contacts coordinate buyer tours, site visits and inspections, streamlining on-site due diligence visits and making sure that any discretion or sensitivity with a location’s personnel and employees is upheld. Their role is pivotal in facilitating communication between the parties.
- Third Party Vendors
Environmental providers, surveyors, engineers, and other technical experts conduct inspections and generate comprehensive diligence reports during the buyer’s due diligence process. Environmental assessors evaluate the site for potential contamination, hazardous materials, and compliance with environmental laws and regulations. Surveyors provide detailed land surveys, verifying property boundaries and confirming legal descriptions which also impacts title policies. Other technical experts, such as engineers and roofing experts assess a building’s structural integrity and condition, to identify potential repairs and maintenance needs. Their collective expertise helps the buyer understand the property's environmental, structural, and legal aspects, enabling informed decisions and risk mitigation strategies during the acquisition process.
- The Title Company
Clear and marketable title is a requirement for close. The title company ensures the property's ownership is free from encumbrances, managing escrow and overseeing the final stages of the closing process.
Conclusion
In the world of sale leaseback transactions, success is only possible through the collaboration of all parties in this sale leaseback village. As the parties come together, the importance of hiring an experienced advisor to manage all parties and workstreams toward a successful outcome becomes clear. To learn more about how a sale leaseback advisor can optimize your process we recommend that you visit our Team’s article "Sale Leasebacks: How to Optimize Your Process."