Utilising your corporate real estate through a sale and leaseback transaction is a smart financing alternative for many companies. For vendors, the best outcome is to maximise the sale price they get while also setting favourable lease terms that ensure the ongoing competitiveness of their business conducted from the property.
Through our experience with these transactions we’ve identified seven steps that will help you achieve the best result from your sale and leaseback.
1. KNOW YOUR PROPERTY
Before the sale campaign, conduct legal and physical due diligence on your property to flush out any problems that need fixing before you go to market.
This avoids the undesirable situation of a buyer identifying a problem during their own due diligence and then pressing you for a price reduction. It can be particularly damaging if this happens when you have entered exclusive negotiations with the buyer and the competitive element of the campaign is essentially over.
Conducting a vendor due diligence also allows you time to think through your risk appetite. A property isn’t just the land. It’s a package of liabilities and opportunities and vendors are well advised to think through these and be clear on their position on risk before going to market. Passing all risk to a purchaser may result in value leakage, particularly where a risk is better borne by the vendor.
2. ENVIRONMENTAL AND BUILDING CONDITION REPORTS
There are good reasons to commission and provide to buyers an environmental report, building condition report and a site survey, which can be relied on by the ultimate purchaser.
- more accurate indicative pricing from prospective purchasers and less chance of “price chipping” when the preferred purchaser conducts their own due diligence; and
- a reduction in the period of exclusivity and due diligence conducted by the preferred purchaser. This in turn gives you a better chance of re-engaging with prospective purchasers should the preferred purchaser not proceed.
3. HOLD ON TO THE DEVELOPMENT POTENTIAL UPSIDE
Well before you start the sale campaign, give early thought to what you can do to improve the sale outcome and weigh that up against the time and cost of those activities.
For example, rezoning an industrial property to residential use can increase the market value significantly. If you market the property as having development potential at the end of the lease back period, the price will be lower (than if you rezoned) to reflect the risk of not achieving a successful planning outcome.
By rezoning the property before the sale, then you as the vendor will retain the development upside.
4. BE CLEAR ON THE LONG TERM PLANS FOR THE PROPERTY AND CONSIDER THE BUYER PROFILE
After the sale do you intend to occupy the property for the long term? If the answer is yes, then you will be targeting investment grade purchasers. They are looking for long term leases, strong financial covenants and confidence around the quality of the building. As you will become the tenant after the sale, ensure you retain the right to carry out upgrades and expansions so that the property continues to meet your needs going forward.
If you plan to occupy the property for a short time only and the property has development potential, then target developers who will be attracted by the short term rental opportunity whilst they prepare for development..
5. KEY LEASE TERMS
Lease terms such as rental, term, option periods and outgoings recovery are pivotal in terms of value. This is where good professional valuation advice is critical, as key lease term decisions must be weighed up against the value they are likely to generate and the ongoing impact on your business.
6. TAX TREATMENT
Ensure the terms of the sale and leaseback result in it being characterised for income tax purposes in the way intended by the parties. Where property is not your core business, think through the tax treatment of the property. For example, holding a property long enough to achieve a rezoning can sometimes characterise the property as trading stock for tax purposes.
7. BE OPEN MINDED TO NON CONVENTIONAL SALES
Where a property has development potential, and a property is sold on conventional terms, vendors are often frustrated when they don’t see much of the development upside. This is because the developer takes the entire development risk.
In a competitive sale process, good developers will innovate and try to find a way to offer a higher price to the vendor, by having a level of participation in the development or achieving a favourable planning outcome. This will of course require you to accept a level of risk in the success of the development. The level of risk and the upside that may follow is a matter of negotiation.