Flexibility for Sellers, Stability for Buyers: Sale/Leasebacks Can Serve Both Sides of Transaction
By John Lecky
A sale/leaseback transaction allows the owner of a property to sell it and then lease it back from the buyer at a rental rate and lease term that is acceptable to the new owner, typically on financial terms that are consistent with the marketplace. The primary purpose of such a move is to raise money or to free up the owner’s equity for other uses, while retaining use of the facility.
Although the type of property involved is usually commercial, sale/leasebacks can also apply to equipment, vehicles or aircraft. In commercial real estate, sale/leaseback transactions can include almost any property type, ranging from large banks to industrial warehouse/distribution buildings to corporate offices to restaurants. In a typical scenario, a corporation will sell its real estate asset(s) to another party, such as a real estate investment trust (REIT) or an institutional or private investor, and then lease the property back at a rental rate based on current market rents.
Another scenario may involve a company that has acquired or built several manufacturing facilities across Canada over the years and is now a successful manufacturer with real estate assets. However, because its core business and expertise is in manufacturing and not in real estate investing, it decides to maximize the use of its capital with a sale/leaseback transaction. The owner sells the property to an investor and maintains the benefits of the location and the building(s) by signing a long-term lease.
To illustrate, in August 2008, Canadian Tire Corporation reached an agreement for the sale/ leaseback of 12 properties across Canada, generating proceeds of $174 million. The company expects to realize a pre-tax gain on the sale of approximately $70 million, which will be amortized over the initial 15-year term of the leases.
Toronto-based Canadian Real Estate Investment Trust (CanReit) acquired eight of the properties for $137.3 million. Each of the 12 properties in the portfolio, which totals 996,000 square feet, includes a recently constructed or expanded Canadian Tire store and six of the sites feature a Mark’s Work Warehouse.
“While we continue to see real value in owning the majority of our real estate assets, carefully selected sale/leasebacks enable us to monetize the value of select properties creating financial flexibility while maintaining our overall operating flexibility,” Canadian Tire CEO Tom Gauld stated in the company’s news release. “The properties included in this transaction are locations featuring stores that are either new or recently expanded so we do not see a need to relocate these stores in the foreseeable future. This enables us to monetize these sites at attractive rates while creating financial flexibility.”
Demand for sale/leasebacks is also brisk from companies with below-investment-grade credit. Owners who are facing rising debt and are unable to obtain financing can reinvest the sale proceeds in their core business and use the cash to fund improvements at their existing facilities.
Given the volatility in today’s global financial markets, cash is a preferred asset because it can provide a hedge against uncertainty. Most businesses are not in the real estate business, and commercial real estate properties owned by businesses are assets that can be converted into cash by disposing of real estate that is not required, and then renting back real estate that is required.
For sellers, a sale/leaseback frees up capital. They gain a lump sum of cash quickly and can focus on their core business rather than having funds tied up in passive real estate. For buyers, equity is invested in a passive, low management intensive real estate asset where the rent provides constant income.
In September 2008, the global biopharmaceutical company QLT Inc., sold its 164,000-square-foot corporate headquarters and an adjacent undeveloped parcel of land in Vancouver to Discovery Parks Holdings Ltd. for $65.5 million. In conjunction with the sale, QLT entered into a five-year leaseback of Discovery Parks for approximately 30% of the facility.
Similarly, Ritchie Bros. Auctioneers Inc. recently completed a sale/leaseback transaction structure for its new head office in Burnaby, BC. “We own most of our auction sites around the world because they are critical to our ability to conduct business,” notes Bob Armstrong, the company’s Chief Operating Officer. “We are willing to allocate capital to these strategic assets, but not to our office buildings.”
John Lecky is a Principal with Avison Young (Canada) Inc. in Vancouver, British Columbia. For more information, see the web site at www.avisonyoung.com.