Jay Koster, Managing Principal, Staubach Capital Markets, Inc. (Aug/Sep 07)
Best Uses for Sale and Leasebacks
Corporate real estate portfolio management is thus developing an active versus static view of real estate value, and sale and leasebacks remain one of the primary tools for realizing value in the portfolio management process. In today's market, the sale and leaseback is being used to:
• Improve the cost of capital for real estate asset financing: In most instances in today's market for highly desirable assets, the cost of capital for the sale and leaseback is lower than the corporate cost of capital, even for the strongest corporate credits. For less desirable assets or sub-investment grade credits, sale and leasebacks frequently result in an overall cost of capital reduction, as the aggressive real estate markets have driven all yield parameters to more aggressive levels.
• Realize unrecognized asset value: Sale and leasebacks require the amortization of gain over the life of the lease term, reducing the ongoing GAAP cost associated with the capital from the sale and leaseback, and on the balance sheet, the sale and leaseback replaces the undervalued real estate with cash equal to the full market value of the asset.
• Utilize capital loss carryforwards: For those corporate enterprises with capital loss carryforwards, sale and leasebacks serve as an effective tool for monetizing both the asset and the carryforward.
As corporate real estate users more frequently evaluate their real estate portfolios, the sale and leaseback is being utilized consistently to adjust the balance of owned and leased assets, and to maximize value of assets by selling and leasing back at the appropriate point in the asset's life cycle, based on the defined business use duration and with a clear view of current and expected market conditions. Most shareholders would be surprised at the amount of real estate market risk they actually bear in holding shares of traditional Fortune 100 enterprises - and would probably prefer to have that capital redeployed into risk areas consistent with general corporate purpose.
Regardless of where the winds blow with respect to lease accounting guidelines, or what the credit rating agencies do relative to treatment of lease obligations in leverage ratios, the sale and leaseback transaction will remain a critical tool for corporate real estate portfolio management. The motives driving current sale and leaseback activity relate much less to balance sheet presentation than they do to maximization of enterprise value and management of real estate exposure.
Jay Koster is managing principal with Staubach Capital Markets, Inc., a division of The Staubach Company that specializes in real estate lease finance for high-credit clients. Mr. Koster can be reached at the company's New York City office at (212) 418-2685.