When considering a sale and leaseback for your business or your portfolio company, you will quickly realize that it is a complicated, nuanced process requiring careful consideration and strategic planning pre and post-closing. This article will guide you through the essential steps to successfully navigate the sale & leaseback process and highlight how engaging the right parties at the right time is critical in order to maximize your outcome both from an economic and flexibility standpoint.
Structure a Compelling Offering
The first step in the sale and leaseback process is to define the terms of the offering. This involves a deep dive into the economic and market landscape, analyzing the credit or covenant of the guarantor, mission-criticality of the asset, and real estate fundamentals of the property. The focus is to create a compelling yet competitive offering that achieves your goals as the seller and provides attractive investment attributes to potential sale and leaseback buyers. This includes evaluating pricing, as well as establishing rental rates, escalators, lease terms, and other lease points that work for both the operating company and the sale and leaseback investor. To ensure that your target pricing and terms are achievable and optimized, it is crucial to engage a knowledgeable advisor who can structure an offering that not only attracts potential buyers but also maximizes returns and provides flexibility that meets the company’s goals, whether those involve an upcoming exit, potential expansion, or other long-term plans.
Understanding All Implications
Two critical implications of a sale and leaseback transaction involve tax and accounting. It is important to complete an analysis of the tax and accounting impacts of the sale and leaseback based on the offered terms before launching the process. Being prepared and leveraging the appropriate experts allows you to optimize the impact and structure for any preferred treatment at the right time during the process – not once it’s too late.
Gather Documentation Ahead of Time
Sale and leaseback investors will require two “types” of information – information on the real estate and information on the operating business. Since these items will be needed in any process, it is best to gather this documentation at the outset to ensure a smooth process without delays. This also ensures that a robust data room can be provided to potential investors from the start, preventing avoidable surprises. Additionally, having historical property documentation can speed up the process of ordering new property reports during due diligence, allowing for quicker closing timelines.
Have Legal Counsel Ready
Once offers start coming in, it is important to have legal counsel ready to go. We recommend working with a firm that specializes in both real estate and corporate finance/M&A to ensure the best legal experts are available to help negotiate the lease agreement and purchase and sale agreement, the two operative documents of any sale and leaseback transaction. Additionally, legal counsel can assist with municipal authorities and local jurisdictions, and provide guidance on funding mechanics and timing, which can vary by country.
Outline Your Salient Lease Points
We recommend discussing any lease provisions that will be important to you or the operating company as early as possible – not waiting until lease negotiations have begun. For example, for private-equity-owned or sponsored businesses, we outline preferred change-of-control and assignment language during the nonbinding indications stage to maintain flexibility. Additionally, if your business plans to expand the facility in the near term, we recommend incorporating a lease provision around expansion financing so the lease is pre-structured for this need. Understanding what these critical points are allows us to incorporate them into the offering early on.
Generate a Competitive Marketing Process
Sale and leaseback dynamics are best handled by a sell-side advisor who acts as an intermediary, creating competitive tension among interested parties while serving the seller’s interests. The advisor’s role is pivotal in generating a competitive bidding process by leveraging their market knowledge and investor network. This customized strategy targets the sale and leaseback investor universe, including private buyers, high-net-worth individuals, family offices, real estate private equity funds, private REITs, public REITs, alternative asset managers, and others. Such competition leads investors to make their best offers, aware of the competition. On average, an advisor-led process can yield more aggressive cap rates compared to direct negotiations, often by 50 to 100 basis points.
Negotiate Flexible Lease Terms
Securing flexible lease terms and options for the business and sponsor is essential for achieving optimal results post-closing. During lease negotiation, it is critical to ensure that the agreement allows flexibility around change-of-control and assignment clauses for potential business exits, substitution rights for portfolio deals, commitments for expansion financing, and other relevant terms, particularly for private equity firms and financial sponsors.
Organize the Due Diligence Process
Managing the due diligence phase, including environmental, technical, and structural diligence, is a crucial part of the sale and leaseback process. Advisors play a hands-on role in this step, ensuring vendor timelines are met and that all necessary information is provided seamlessly to the investor and their advisors. Effective due diligence management ensures a smooth process, while maintaining confidentiality, discretion, and other key considerations around site visits.
Maintain Backups to Ensure Certainty of Execution
To mitigate execution risk, it is wise to keep potential backup buyers. This provides flexibility if the selected investor cannot perform, while also maintaining leverage with the chosen investor, knowing there are alternatives. Including backup buyers in the process ensures accountability, minimizing the risk of complications during lease negotiations, due diligence, or deviations from agreed terms.
Conclusion
While the sale and leaseback process might seem complex, with the right sell-side advisor and upfront planning, it can yield significant benefits with minimal burden on the company or sponsor. At Ascension, we believe that a qualified advisor takes a comprehensive approach, providing reliable guidance from start to finish. This includes a precise valuation, overseeing investor marketing, leading lease and purchase agreement negotiations with legal counsel, managing due diligence, coordinating with external vendors, and handling all administrative aspects of the deal. The goal is to make the sale and leaseback process efficient and seamless for the client.
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