That compelling statistic commands attention among real estate professionals in the sale-leaseback arena, particularly in light of corporate America's increasing desire to free up its balance sheet and focus on core competencies.
Sale-leaseback transactions are hardly new. Indeed, pioneer Sidney Domb capitalized on the idea 28 years ago when he founded Miami-based United Trust Fund (UTF), which specializes in the purchase and leaseback of corporate real estate.
The concept sounds simple enough. The owner becomes a rent-paying tenant. Less understood, however, are the many details related to procuring a sale-leaseback with a company, including the broker's role in the sale-leaseback transaction, lease terms, credit vs. real estate, and the creativity sometimes required to execute a deal.
Recognizing the opportunity to spread the word about sale-leasebacks and educate interested parties in the process, UTF and National Real Estate Investor co-sponsored a symposium entitled, "Capitalizing on Corporate Sale-Leasebacks." Held recently at the Ritz Carlton-Buckhead in Atlanta, the event drew more than 180 attendees, including brokers, lenders, lawyers, developers and corporate executives.
Sale-leaseback basics Real estate and credit are the two elements of a sale-leaseback, emphasized UTF's Fred Berliner, who refers to this industry niche as "basically a simple business." Companies with a relatively high credit rating are deemed to be investment-grade companies by rating agencies.
"A change which many of you may not be aware of is that more than 65% of our business comes from sub-investment grade or non-rated companies," said Berliner. "Given that such a large percentage of our business comes from this sub-investment grade arena, we're constantly reinventing the wheel with new strategies to get deals done with the guidance of people like yourselves."
UTF purchases all types of real estate, including office, industrial, R&D, retail, and special purpose properties such as restaurants, gas stations, banks, schools and pawn shops. The minimum transaction size is generally $5 million. Among UTF's milestones, according to Berliner, are its affiliation with Metropolitan Life Insurance Co., UTF's capital partner, and its launch of a build-to-suit division three years ago.
Sources of business for UTF include both the primary and secondary markets. The primary market is defined as those companies that want to sell their real estate and lease it back at a mutually agreed price, rent and other terms. The secondary market refers to investors or developers who have negotiated and closed their deals and now want to sell them.
Berliner predicted a robust market for sale-leasebacks in 2000. "We're seeing a strong demand by corporate America for sale-leaseback capital. In a low or high interest rate environment, the business will go on. Oftentimes, a sudden increase in interest rates is an opportunity because it will serve as a wake-up call to corporate America that interest rates are still at historic lows and now is the time to do something," said Berliner.
The real estate broker's role Brokers are the wheel of the hub in bringing the parties together in a sale-leaseback transaction, said Douglas Siedenburg of The Siedenburg Group. "We need to seek solutions and answers, and to always provide exactly the information we're given."
Brokers should not assume the role of lawyer or CPA in such transactions, said Siedenburg ."It's critical to rely on the specialists to focus on the technical side because they're more capable of doing it than most brokers."
Siedenburg said it's vital that brokers understand why corporations pursue sale-leasebacks. For example, a corporation that owns a piece of real estate typically can finance that property up to 75% loan-to-value, leaving 25% of its business capital in the real estate. In a sale-leaseback transaction, the corporation can take 100% of that business capital out of the real estate and invest it at a higher rate within its operating business.
Strategic value Quite often corporate real estate is the second or third largest asset on the balance sheet at Fortune 500 companies, said Ted Barr of Deloitte & Touche. "Even more interesting is that it is usually the second or third largest expense associated with running the business, and rarely is it ever really managed."
On a pre-tax basis, owning real estate makes sense from a corporate point of view, said Barr, but on an after-tax basis the tax benefit of leasing is significant and often overlooked.
"In particular, real estate tends to sit on the balance sheet earning the equivalent of the inflation rate, or 4%," said Barr. "I would argue that any CFO would be relatively upset if any other asset category was earning anywhere near that figure."
The solution? Treat corporate real estate like any other asset that can generate value to the bottom line. "If used well [sale-leasebacks] can lower operating costs, drive value to the P&L statements, and increase shareholder value."
Making money There are several ways brokers can earn money through sale-leasebacks, said UTF's Sidney Domb, who offered this sage advice. "The greatest asset you can have in making money is education," said Domb. "The more different ways that you know that you can put together a deal, the more money you can make and the quicker you can make it."
Perhaps the most conventional deal follows this scenario: UTF buys an office building for $60 million, and the tenant leases it back. In that instance, UTF wrote a check to the brokers for $600,000, recounted Domb. "Corporations do not like to write big checks to brokers."
A second type of sale-leaseback deal unfolds when UTF buys the land and gives a company the money to build the building. Once UTF closes on the land and puts the money into escrow, the broker receives a check.
A third way for brokers to earn money occurs when UTF buys the land and builds the building for various retailers.
Still another type of deal occurs when UTF purchases a building and gives the tenant money to completely remodel the building and lease it back.
"Once someone in a corporation decides that he is going to do a sale-leaseback, that person needs someone in the real estate business to get the deal done, and that's where every one of you comes in," said Domb.
Capital markets overview William Green of Banc of America Securities provided an overview of the debt market. Securitization is not a fad, he told the audience. Today, securitization represents 15% of all commercial loans. "I absolutely expect it to be 65% to 70% of the market over the next 10 years."
He cautioned, however, that the public markets can be unusually harsh. "The problem with a liquid investment is that it moves freely," said Green. "When people get negative on a stock, over the short run the capital markets are absolutely irrational." Nevertheless, the capital markets do impose discipline, Green added.
The bottom line is that the various lease issues need to meet capital market standards, emphasized Green. "Pay attention to what really is required to get as close to a bond lease as possible."