Mandelbaum Sale-Leaseback Advisors

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Structuring & Accounting

Property Valuation

  • Sale leaseback real estate is typically valued at 100% market value as determined by an independent appraiser.

Lease Structure

  • Most investors will require a lease term of at least 15 years. a 20-year lease is preferred for companies with poorer credit or for real estate in secondary or tertiary markets. Renewal options of 20+ years, in 5-year terms, are common.
  • Leases are structured as absolute bondable triple-net leases, which mean that the tenant retains complete operational control of the property and is responsible for all building repairs and maintenance, insurance, real estate taxes, etc. The only contact with the sale-leaseback investor is for payment of the rent.

Lease Pricing

  • In the current market, initial cap rates (the ratio of the lease payments to the transaction value) for investment grade credits are usually 6-7% or better, BB credits are typically in the 7-8.5% range, and B and below credits often fall between 8-12%.
  • In addition to the company’s credit, the location, quality and age of the real estate, as well as the term of the lease, will also affect the pricing.
  • For sub-investment grade credits, there will usually be increases in the lease payments over time. These bumps could be a fixed amount (typically 1-3% per year) or tied to inflation, and could be annual or once every 5-10 years.
  • A security deposit is sometimes required for poorer credits.

Repurchase Option

  • Some buyers have the ability to offer a repurchase option at the end of the lease term or, in rare occasions, at specified times during the lease.
  • The repurchase option could be based on future fair market value or at a specified price. Note that a fixed-price repurchase option would create capital lease (on balance sheet) accounting treatment.
  • We can provide investment grade credits with a $1 repurchase option at the end of the lease term.

Timing

  • Our clients can typically close a transaction within two months of agreement on the letter of intent. Closing can often be accelerated to meet your requirements.

Operating Lease vs. Capital Lease Accounting Treatment

  • Sale-leasebacks are usually structured as operating leases (i.e. off-balance sheet), but will be considered capital leases in certain circumstances. A sale-leaseback is treated as a capital lease when:
    1. The lease term exceeds 75% of the property’s usable life
    2. The lease value is greater than 90% of the property value
    3. A buy-back agreement is written into the lease
    4. There is a buy-back option at a fixed price.
  • Proposed GAAP accounting changes would capitalize all leases on a company’s balance sheet, but would retain operating lease accounting treatment on the income statement.
  • For investment grade credits, certain capital lease structures can offer a significantly lower cost of capital.

Pre-payment Penalties from Existing Mortgages

  • Mortgage pre-payment penalties (if any) can be capitalized into the sale-leaseback transaction price.

Advisory Fee

  • We earn an advisory fee that is paid at closing out of the sale-leaseback proceeds.  We compete for your business and only get paid if we provide the most competitive solution.