The following are answers to many of the questions most frequently asked by property sellers when they are considering sale-leaseback financing*. If your question is not listed, please contact Horn Capital Realty, Inc. at 305-864-2000 for prompt information.
A large company sells one or more of their single tenant properties to an investor, usually for fair market value. The investor provides the seller with a triple-net operating lease for a period of 10 to 25 years plus options so that the seller can continue to occupy the property. Initially, the seller/tenant usually pays the investor a negotiated annual rent equal to 6% to 12% of the contracted sale price. Most often, the rate is credit-driven and the real estate is considered to be additional collateral.
In a NNN lease the single tenant agrees to pay all expenses associated with the property use and occupancy, including the cost of: insurance, real estate taxes, improvements, on-site property management and maintenance, in exchange for control of the property and a favorable long-term lease.
A sale-leaseback, structured properly with an operating lease, in addition to expense reduction and the conversion of the seller/tenant’s illiquid real estate assets to capital, can provide the seller/tenant company with the following business advantages:
1. 100% financing based on the assessed value of the property
2. Operating leases that do not appear on the tenant’s balance sheet as debt or as a long-term lease obligation
3. Full control of the tenant’s real estate under lease provisions
4. Tax deductible lease payments
5. Cash realized from the sale-leaseback transactions that can be used to enhance liquidity, expand operations, acquire other businesses, reduce debt, invest in 1031 exchanges, etc.
A triple-net leasehold obligation that qualifies as an operating lease under the criteria set by the Financial Accounting Standards Board (FASB) will not appear on the tenant’s balance sheet as either debt or a long-term obligation. Therefore, after paying off mortgage obligations and receiving unlocked cash from the sale of the seller/tenant’s depreciated real estate, the seller/tenant will not add a new leasehold debt to their balance sheet. The improved debt-to-equity ratio can make a seller/tenant much more attractive to banks and other traditional lenders.
A single tenant, triple-net lease is usually a long-term, low cost operating lease. The tenant is responsible for the payment of property: taxes, maintenance, management and insurance. Most traditional residential and commercial rental properties, such as office buildings, apartments and mini-warehouses have multiple tenants and the real estate owner, not the tenant, must pay operating expenses, provide on-site management, and be responsible for periodically re-leasing all or part of the property.
The owner leases out individual units for short terms, renovates each premise, collects the rent, pays the property taxes, maintains the property, and provides insurance, legal, accounting and other services. All of the expenses are passed on to the tenants as additional rent or surcharges. With a single tenant, triple-net lease agreement, the large corporate tenant agrees to be responsible for most of the expenses associated with the ownership of the property in return for a long-term lease.
Service Centers, Office Buildings, Fast Food Establishments, Distribution Warehouses, Industrial Facilities, Retail Stores, Educational Buildings and Health Care Facilities, etc.
Blockbuster Entertainment, Dairy Mart, Eckerd Drug, Haverty Furniture, Home Depot, KFC, Kmart, Monro Muffler, NorAm Energy, NYNEX, Payless Shoe Source, Taco Bell, United Auto Group, Wal-Mart, Walgreen Drug Stores, and Wild Oats Markets.
(1.) Companies that own and occupy properties with considerable equity, based on current market value;
(2.) Companies that want less debt on their balance sheet and more tax deductions on their annual tax returns;
(3.) Companies that want more flexibility in retaining, moving or disposing of their business locations; and
(4.) Companies that do not want to own illiquid real estate assets.
The annual rate for a triple-net lease property currently varies from 8% to 15% of the properties purchase price, depending on the financial strength of the tenant. For example, a new franchisee would be considered the highest risk. A multi billion-dollar profitable corporation with good management, that has always fulfilled its lease obligations, would be the lowest risk and earn the lowest rate.
The tenant maintains and manages the property on-site. The tenant also insures the real estate, pays all or most of the property expenses and pays the property taxes directly to the taxing authority.
The tenant is not exposed to any major risks other than the typical risks associated with any property. However, if the tenant is delinquent in paying their rent or abuses the premises, or renovates the premises without proper approval, the tenant could be in breach of their lease.
The tenant can once again lease the property at a new negotiated rate or if the tenant had a renewal clause in their initial lease they could exercise their option and re-lease the property from the landlord at the rate specified in the renewal clause. The tenant can also move to a new location.
Most leases include a renewal option beyond the original lease term. These options are typically negotiated up front for a fair market or fixed increase. Seller/Tenant should always use competent tax and legal experts when considering different financing alternatives including sale-leaseback financing, etc.