Credit is hard to find these days, forcing some companies to look at alternative ways to raise money, pay down debt or fund a new product. One such option that makes sense for companies who own their buildings is a sale-leaseback. It allows owners to liquefy their property assets by selling them to investors while remaining a tenant in those buildings.
“If you’re sitting on an asset that could be worth millions of dollars, and if you’ve got a business that requires capital, you can take that real estate and sell it, providing it’s a well-located, quality asset and the tenant is financially sound,” says Ian MacCulloch, vice-president of research for Colliers International. Other than increasing capital and the ability to spend it, a sale-leaseback doesn’t disrupt operations as much as moving, and property lease payments are a deductible operating expense.
Gennum Corp. (TSX: GND) of Burlington, Ont., is one company that has recently taken advantage of a sale-leaseback. Two years ago, the semiconductor company began divesting its non-core product lines and money-losing businesses in order to redirect its R&D investments into its core operations. “To me, bricks-and-mortar investment is not a really strategic use of our capital, and the deal was also very convenient, because it was before the real estate market started to decline,” says Gord Currie, CFO of Gennum. Gennum last August completed its sale-leaseback for $13.5 million in cash to LPF Realty Office Inc, a real-estate investment firm. As part of the sale, the company leased back the entire building for the next 15 years, which amounted to all the 68,000 square feet they previously owned.
Ian Gragtmans, a senior vice-president on the brokerage side of Colliers International, says the timing is still right for companies to consider sale-leaseback strategies, because they can release much-needed capital, which can assist in paying down debt or act as a leverage in pursuing mergers and acquisitions. “In addition to using the funds to pay down debt, it’s a tremendous time to buy,” he says. “So many companies are devalued, and you can take capital that is locked into real estate and buy devalued companies that are a good fit for your own.”
The building’s new owner, of course, needs to make sure that its primary tenant has the financial strength to withstand economic challenges and will stay in the building long-term. And, adds Gragtmans, it’s crucial that the property is generic enough to be re-leased in case the primary tenant leaves or fails as a going concern.
Companies do lose a steady long-term investment when they sell their properties, but if used wisely, the proceeds should return better numbers than if they were tied up in real estate. “Our sale-leaseback was neutral from a profit-and-loss perspective,” Currie says. “Now we make lease payments, when we used to depreciate the building. From a financial guy’s perspective, it’s a no-brainer.”