Date post: | 12-Feb-2017 |
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Sale &
Leaseback and
Build-to-Suit
Sale & Leaseback and Build-to-Suit Overview
1
Two types of financing structures are available to release cash locked in real estate assets
Sale and Leaseback Build-to-Suit
• For built real estate assets that are being occupied by the business
• Seller agrees to a long term lease for the asset
• Enables monetization of real estate assets on the balance sheet while maintaining full operational control of assets
• Lease terms dictated by seller/occupier
• Development of a new real estate asset for occupier
• Development cost is fully funded by third party real estate investor
• Asset developed as per occupier’s requirements
• Pre-agreed lease terms dictated by occupier
• Dividend payout
• Reinvestment in core business (expanding production lines, marketing campaigns, new outlets)
• Debt repayment
• Business Growth (M&A and organic growth)
Release cash for
Sale & Leaseback Overview
2
How it works
Corporate (Occupier) Real Estate Investor
Occupier receives 100% of sale
proceeds2
3Investor leases the property back to
the occupier under a long-term lease
Occupier sells property to investor at fair
market value1
Occupier pays rent during the lease term4
Typical Sale and Leaseback Structure
Asset Sale
• Transfer ownership to real estate investor
• Seller / occupier receives sale proceeds
Asset Leaseback
• Enter into a long term lease with the real estate investor
• Flexible lease terms based on occupier’s requirements
Build-to-Suit Overview
3
How it works
Typical Build-to-Suit Structure
Corporate (Occupier) Real Estate Investor
Investor develops the property as per
the occupier’s specifications2
3Occupier enters into a long term lease
on the property
Occupier prepares the specifications for
the required development1
Investor receives rental payments from the
occupier4
Asset Design & Development
• Corporate occupier prepares design documents
• The occupier prepares development specification
• Investor builds the property and ensures that the development is in line with the occupier’s required specifications
Lease Agreement
• Occupier enters into a long term lease with the real estate investor for the property
• Occupier pays rent to the investor as specified in the lease agreement
Sale & Leaseback and Build-to-Suit OverviewOwning vs. leasing corporate real estate
Occupiers (corporates) can choose to either own or lease their real estate space. The following are the pros and cons of each:
Own Lease
Vs.
Pros
Ownership
No recurring payment liability
Cons
Costly – initial outlay required
High opportunity cost – reinvesting in your core business
Not accounted for in the company’s DCF valuation
Pros
Cheap
No initial outlay required
Tax deductible
Full operational control
Potential accounting ratio improvements
Cons
Fixed liability
No ownership
4
Summary
• Operational Efficiency: owning real estate assets for occupation purposes may not be financially efficient
• High Opportunity Cost: owning occupied real estate has a high opportunity cost, the cost of using the locked capital to invest in the core
business and generate higher returns
• Increase Shareholder Value: unlocking the value in occupied real estate may result in improving shareholder value
Sale & Leaseback and Build-to-Suit Overview
5
Alternative Financing
Corporates regularly require capital in order to fund their ongoing expansion and/or payout dividends/debt. Accordingly, corporates can seek capital
from the following sources:
Cheaper than equity financing
Higher loan to value compared to debt
financing
Flexible terms up to 25 years
Terms dictated by the occupier
No dilution of ownership
Rent expense is tax deductible
Fixed liability
Short tenor (5-8 years)
Limited to 50-60% of the property value
Additional security may be required
Expensive
Dilutes ownership
Less voting power
Debt
Sale & Leaseback and Build-to-Suit
Equity
Typical Lease Structure
6
Flexibility to match lease terms to business requirements
PurposeLiquidate long-term assets, thus improving the balance sheet
while retaining control over the property
Tenant
Usually strong middle-market to investment-grade corporate
ownership or corporate holding companies. Triple-net leases
(lessee pays all costs associated with the operation of the
property)
Rental Rates
Calculated as a percentage of the purchase price or gross
development value, usually with embedded escalations
throughout the lease term
Term
Sale and Leaseback: 10 years and above
Build-to-Suit: 15 to 25 year lease terms
Options to include renewal periods
Advance 100% of fair market value
Property Freehold ownership. Ground leases are exceptions.
Preferred
PropertiesResidential, office, industrial, retail, medical and education.
• Tenants have the flexibility to negotiate lease terms matching their
business requirements:
- Lease term
- Rental rates and escalation pattern (ie. fixed or inflation indexed)
- Payment frequency
- Ability to sub-lease
- Renewal options
- Future improvements and/or property expansion
- Buy-back options
• Lease terms can also be adjusted to meet specific accounting
considerations
- Classification of capital or operating lease depending on local accounting
regulations
Maintaining Control
7
Flexible buy-back options can be pre-agreed
Sellers can maintain control over the asset by way of a variety of structures:
• Long Term Leases: Leases typically run from 10 to 25 years with renewal options
• Right of First Refusal: Lessee retains pre-emption right in the event the lessor wishes to sell the property during the lease term.
• Sale Restrictions: In the case of strategic assets, restriction on sale of the property to direct competitors.
• Buy-Back Options: The lessee retains an option to buy back the property during or at the end of the lease term.
• Reversion at Lease Maturity: Ownership of the property reverts to the lessee at the end of the lease term
• Land Lease Structure: Only the building is sold and the lessee retains ownership of the land which is in turn leased under a long termlease to the new building owner.
Selected Sale and Leaseback Transactions
8
Local and international companies increasingly relying on SLB transactions
Seller Industry Assets Location Value Date
Large Corporate Industrial 2 residential compounds Saudi Arabia $ 700m 2014
Time Warner Media Time Warner Center USA $1.3 bn 2014
GEMS Education GEMS World Academy UAE ca. $75-80m 2013
MMG Construction Headquarters Saudi Arabia $10 m 2013
Azizia Panda Retailer 5 supermarkets Saudi Arabia No Disclosed 2012
Nokia Electronics Headquarters Finland € 170 m 2012
Caixabank Financial Services 439 properties Spain € 428 m 2012
Medica Healthcare 15 healthcare centres France € 132 m 2012
Agrokor Food 8 stores Croatia € 35 m 2012
Peugeot Citroen Automotive 9 retail properties UK £ 30m 2012
Tesco Retailer 4 stores South Korea £ 300m 2012
Safi Danone Food HQ and distribution centre Saudi Arabia Not Disclosed 2012
Jarir Bookstores Consumer Goods 2 retail centres Saudi Arabia Not Disclosed 2011
Carrefour Retailer 97 supermarkets France € 365 m 2011
Metro AG Retailer 20 wholesale markets Italy € 400 m 2011
Azizia Panda Retailer National Distribution Centre Saudi Arabia $ 80 m 2010
Tesco Retailer 41 supermarkets UK £ 950 m 2010
NY Times Publishing Headquarters USA $ 225 m 2009
Laureate Education Education School campus USA $ 29 m 2008
JLL Can Help
How JLL Can Help
10
End-to-end service offering
Existing RE Portfolio Review
Transaction Structuring
Asset Valuation Advisory
Sourcing Equity and Debt Sources
Identifying Developer (for
BTS)
Lease Structuring & Negotiation
Transaction Closing
JLL can advise on and manage the entire process on your behalf
• As one of the world’s leading real estate investment advisory firms, JLL can help you structure and negotiate the most
effective build-to-suit (BTS) or sale-and-leaseback (SLB) transaction to meet your financial and operational
requirements:
- Review your real estate portfolio and expansion plans and determine where the use of alternative financing structures make sense
- Leverage JLL’s local, regional, and international investor network to source the most cost efficient financing sources
- Structure a transaction that meets your needs and run a competitive process to achieve the greatest cost savings
- Help structure and negotiate long-term occupational lease
- Manage the entire process and liaise with other third party advisors until transaction closing
Why appoint JLL
• Protects investor’s interests by ensuring full transparency, avoiding conflicts of interest, and ensures that transactions are conducted on an arms-length basis
• Ensures full market coverage by leveraging JLL’s extensive relationships across investor groups and geographies
• Your investment teams save time and continue to focus on your core business while JLL manages the process, answers questions, and acts as a single point of contact for all prospective investors
• Creates competitive tension between investors
Maximises sale proceeds
Thank You
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