Should your business own its own property, or would it make better sense to sell it and lease it back? John Schellekens, of PwC's Real Estate Advisory, explains ways of structuring real-estate occupancy.
Real estate is a key element of almost all businesses. The decision to own or lease, and how you’ll do it, needs some careful thinking.
A clear strategy can help to underpin your business strategy; the tradeoff is generally between control and potential capital growth through property ownership, or greater access to capital through renting. The most common reasons for selling your company’s real-estate assets are to release capital, or to restructure your balance sheet.
These are rational decisions, but what are the potential consequences, and how do you get the best result from this strategy?
Is your building a core asset?
I see the importance of real-estate assets to a business as being on a continuum. At one extreme, your building could be a specialised asset which is fundamental to business success and you need to have control over it.
At the other end of the continuum are companies occupying properties that are generic, in ready supply and not essential to the business, and could be leased.
There are many ways of structuring real-estate occupancy (see above).
There are several kinds of lease:
· An operational lease (sale and lease-back) is popular at present given historically low real estate yields.
· A hybrid ‘finance’ lease (sale and lease-back) will give a level of control more consistent with ownership.
Larger businesses may look at a capital market event, public or private listing, involving transferring the asset into a separate investment vehicle and introducing new capital but, for most businesses, this won’t be an option.
Some things to think about before you embark on a sale and lease-back strategy:
· Control is important. Ultimate control will come from owning your own building. You can retain an element of control via a lease, but you may not be able to expand your real-estate requirements to match your business needs with the same level of flexibility. Ownership will usually be preferred if your building is a critical part of a supply chain network and where loss of control would have an adverse impact on operations.
· Capital efficiency. Consider flexibility and risk. Ask yourself if your business is the best entity to own an asset, due to maintenance, capital expenditure and funding needs. It may not be. Linked to this is the impact on your financial ratios and bank covenants. Real estate ties up a lot of capital that might be better invested in growing your business.
· Marketability. Buildings that are relatively generic and well located, such as a standard industrial facility in an established industrial location, are more liquid than specialised assets or assets in less desirable locations. It can be harder to exit specialised buildings. Where this is the case and you’re planning to move on, lease structuring is important.
· Tax and structuring. You also need to consider shareholder arrangements and tax and depreciation consequences.
Finally, where you think it’s appropriate to sell a building or group of buildings and lease them back, you need to consider the best approach to structuring the lease to ensure the right balance between maximising the sale price, but not over-burdening the business with unsustainable future lease commitments.
First published 28 May, 2018.
Story by John Schellekens, PwC, with Robert Cameron and Richard Chung
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