Real Estate: Sale and Leaseback, and Occupier and Investor Perspectives - Term Paper Example

Real Estate - Sale And Leaseback – Occupier and Investor Perspectives Table of Contents Nature and Key Features of Sale and Leaseback Transactions 3 The Potential Advantages of Sale and Leaseback Transactions from an Operational Perspective 4 The Issues that Might Arise for Effective Management of the Real Estate 5 Equity Risks 6 Property Value or Ownership Concerning Issues 6 Rental Market Risks 7 Exit Cost Risk 7 The Influence of Current Market Conditions on the Feasibility and Terms of Sale and Leaseback Transactions 8 Conclusion 12 References 13 Bibliography 15 Introduction From the past few decades, sale and leaseback transactions are mostly executed by the commercial real estate investors and corporate inhabitants in order to firmly allocate their capitals and investments. In this context, it has been observed that APM, a UK based bank possesses a corporate real estate team which provides valuable advice to the bank regarding financial asset or property transactions. The bank comprises 800 branches within the UK. The various branches of the bank hold different status in terms of their portfolio including both freehold and leasehold assets. With regard to the continuous growth in the corporate real estate performance, APM possesses 60% of its branches as freehold; 15% of branches are held in terms of leases which is of an unexpired term of over 25 years as well as 25% of its total number of branches are held on lease with unexpired terms ranging from 1 to 25 years. Based on this context, the report will focus on recognising and understanding the significance of sale and leaseback transactions of commercial real estate corporations. The discussion of this report will further demonstrate the decision making process of the real estate corporations concerning the aspect of sale and leaseback transactions based upon the theories from recent practical scenarios. In addition, this report will further develop potential abilities in information retrieval, problem solving as well as written communication skills which can significantly provide major insights in the sale and leaseback transactions activities of the real estate corporations. Nature and Key Features of Sale and Leaseback Transactions According to the observation made of the recent sale and leaseback transactions in the real estate sector, it can be stated that a majority of corporate and professional occupiers predominantly incorporate the this transaction process in order to gain a potential returns of their investments. The sale and leaseback transactions can be defined as the process of corporate occupiers of the commercial belongings to sell their assets and occupy certain properties through performing a long-term lease with a real estate financier (Tipping & Bullard, 2007). According to the present day context, it has been observed that a range of investment-grade as well as below-investment grade real estate corporations are considering sale and leaseback transactions to be an essential corporate financing tool. Moreover, the modern real estate corporations also implement sale and leaseback transactions as an effective alternative to their financing appeal process in order to unlock the value of their real estate properties and invest the proceeds to accomplish a good amount of returns of their investments (Mansour & Scott, 2012). The sale and leaseback transactions can be defined as a practice through which a public or corporate corporation sells its assets to another corporation and then again leases the sold property. In this type of transaction, the lease owner typically a financial institution or leasing company provides lease to the previous owner of the property. The sale and leaseback transactions of real estate corporations may take place due to various reasons including obtain access of equity as well as capital in order to make re-investment at the time of use of the assets or for retaining possession of the property (Ray & Rowley, 2007). Moreover, the sale and leaseback transactions may also offer the right to leaseback the assets from the purchaser after accomplishing the selling process with a relevant understanding among both the parties. The major elements of sale and leaseback transactions are significantly lucid and quite understandable where the owner of a property sells its assets including lands and buildings to a prospective buyer. Simultaneously, in this transaction, the seller of the property leases back the sold assets from the buyer which is typically used for a period within 10 to 20 years. In certain instances, the seller of the property may further make a decision of extending the lease period beyond the initial terms of the sale and leaseback transaction. The sale and leaseback transactions between the seller and the buyer nearly involves respective roles where the seller of the transaction requires to pay the taxes considering the property along with expenses related to the occupancy of the assets. According to the general significance of leaseback structure, the seller of the property is considered as the occupant of the assets whereas the buyer is not required to put any harder initiative in order to manage the assets. In relation to the sale and leaseback transaction guidelines, it can be observed that the seller of the property provides a check to the buyer as well as to the mortgagee who funded the acquisition process of the property (Davis & et. al., 2007). The Potential Advantages of Sale and Leaseback Transactions from an Operational Perspective The major advantages of sale and leaseback transactions can be recognised to be an influential financial tool which enables the occupiers to enhance the level of flexibility of their financial position. By playing the role of both seller and the lessee, the occupier of a property can significantly negotiate from a strong position by ensuring that continuous control in relation to facilities is maintained. It facilitates the occupier or the owner of a property to liberate capital for investment purpose within his/her primary business. Moreover, the sale and leaseback transactions are fundamentally incorporated by the modern real estate corporations in scenarios when the performance of equity markets unpredictable as well as due to the reason that it provides steady along with long-term yields. In addition, the sale and leaseback transactions can further provide significant advantage as an alternative procedure to the method of conventional financing (Spark & O’Brien, 2012). The Issues that Might Arise for Effective Management of the Real Estate According to the rapid development of the property market along with the increasing pace of the global corporate real estate scenario, it can be identified that different kinds of risks concerning volume of trading as well as liquidity in the real estate performances exist. From the perspective of APM, the financial organisation should be conscious regarding the possible risks which might affect it in terms of managing the real estate property transactions. Moreover, the risks concerning sale and leaseback can also be taken into concern in terms of effectively managing the real estate trading operations. From the perspective of identifying possible risk factors in the real estate property transaction, it can be identified that four types of fundamental risks including equity risks, risk concerning property value or ownership, rental market risks as well as exit cost risk factors are significantly considered to be the major concerns for APM in its sales and leaseback transaction activities (Devaney & Lizieri, 2004; Morris, 2010). Equity Risks In relation to operating sale and leaseback transaction practices, the equity related concerns can be identified as one of the general risks for the corporate real estate corporations. These types of risks are fundamentally faced by the investors in underlying the outcome of the sale and leaseback process along with adjusting price of the properties as well. In order to minimise equity related issues, the sale and leaseback activities of APM should be focused on optimising capital structure of the firm which can be used in both leasing and as a conventional debt as well in the similar capital market (Devaney & Lizieri, 2004). Property Value or Ownership Concerning Issues The sale and leaseback transaction significantly involves core financing activities which entail different issues concerning property or asset related risks for the sellers-lessee. With due consideration to the property value or ownership related issues, APM can raise the capital amount of the properties as well as outsourcing ownership in an equivalent amount to its assets’ value in order to mitigate property or ownership concerning issues. This strategy can facilitate the organisation to sustain a long-run benefit within the corporate real estate industry (Devaney & Lizieri, 2004). Rental Market Risks The rental market risk in the real estate industry can be generated when the corporation deals its outsourcing activities which can further invite new source of market risks. The rental market risks can be considered as one of the most exacerbated issues in the United Kingdom traditional sale and leaseback structure. The issue comprises the practices where the occupiers of the property are faced with a scenario of increasing cost of the properties in the strong real estate market, however, the occupiers are not able to accomplish substantial benefit from reducing cost in various difficult market scenarios. From the perspective of APM, the possible risks from the rental market can be mitigated through negotiating the increasing fixed rates rather than reviewing the market condition (Devaney & Lizieri, 2004). Exit Cost Risk Exit strategy can be regarded as an important aspect in the corporate real estate operations which ensures to provide beneficial returns of the investments in the sale and leaseback transactions. An effective practice of exit strategy can facilitate the investor or property seller to accomplish a substantial benefit from its investments. With this concern, an effective practice of exit strategy can be beneficial for APM through effectively maintaining the real estate groups by the finance director in order to put additional investments to occupy new businesses. This type of exit strategy can provide benefit to the organisation to mitigate future investment related risks in the real estate industry (Morris, 2010). In addition, the modern technological advancement can be observed to be one of the major issues for the real estate corporations which are significantly confronting with corporate agencies both in the commercial as well as multifamily accommodation properties. In general, it can further be observed that the aspects related to real estate property business are enhanced by the technological advancements. It involves in various operations including tenant as well as client relationship, building security of the property management, maintenance and operations, financial accounting and analysis processes along with monitoring and reporting activities that can be affected by the internal and external threats (Institute of Real Estate Management, 2006). The Influence of Current Market Conditions on the Feasibility and Terms of Sale and Leaseback Transactions The real estate corporations considerably gain a substantial return from their core business in comparison to investing capitals in order to own real estate market. The emerging sale and leaseback transaction can facilitate to acquire 100 percent of their property value rather than financing mortgages in a traditional business way which has about 65 percent of Loan-to-Value (LTV) in the current real estate industry (Mansour & Scott, 2012). According to the present condition of real estate market, it has been observed that the industry considerably achieves continuous growth through effectively practicing sale and leaseback transactions among the sellers and the buyers. Moreover, it generates a strong relationship among the lessee and lessor while performing leaseback transactions. Therefore, it can be observed that various benefits that can be achieved by APM in order to sustain its real estate operations by mitigating different types of risks with the present sale and leaseback transaction process within the real estate industry. The benefits can be considered to be of various types, such as: Effective Financial Tool The sale and leaseback transactions can be an effective financing tool for the real estate corporations in order to own new real estate business. In keeping with the continuous fluctuation of the global economy, the commercial financing institutions are not willing to bear risk of providing loans to the real estate corporations. With this concern, the sale and leaseback transactions are among the most feasible alternative options for the modern real estate corporations to acquire a good return of their capital investments (Mansour & Scott, 2012). Transfer Concerning Risks With due consideration to a sale and leaseback transaction process in the present real estate market, it can be affirmed that the process ensures to offer substantial values as well as occupancy rights to the investors in terms of performing in a long-term lease period. As per the present day context, the real estate industry significantly involves residual value risks relating to the unneeded asset to a third-party operator which may considerably affect the real estate investors. Therefore, practicing an effective sale and leaseback transaction can be a feasible tool for the occupiers to mitigate such types of risks (Spark & O’Brien, 2012). Reducing Management Related Cost The process in the sale and leaseback transaction involves modest asset management activity which ensures to acquire property occupied through an enduring tenancy. The process significantly increases the investment value of the property buyers because the sale and leaseback transaction possesses a minimum operating cost in the investment process. Therefore, it can be identified that sale and leaseback transactions also possess feasible advantages which enable to deliver substantial benefits to the occupiers in the investment process (Mansour & Scott, 2012). Conclusion According to the rapid development of the global real estate industry, sale and leaseback transactions considerably play a crucial role for the occupiers in order to obtain greater significance in the real estate market. It has evolved to be recognised as an effective process for the modern investors in order to unlock the value or achieve a greater return of the investments of their real estate properties. From the perspective of APM, the sale and leaseback transactions would be more feasible in order to improve their performance in the real estate industry. Moreover, an effective practice of the sale and leaseback transactions can be effective for the organisation to mitigate different types of future risks within the industry. According to the present performance of the global marketers in the real estate industry, the practice of sale and leaseback transaction provides feasible support to the organisation through minimising equity risks, property value related issues, rental market risks along with exit cost risk. References Davis, B. E. & et. al., 2007. Sale-Leaseback Transactions in Today’s Private Equity Environment. Venture Capital Review, Iss. 19, pp. 1-12. Devaney, S. & Lizieri, C., 2004. Sale and Leaseback, Asset Outsourcing and Capital Market Impacts. Journal of Corporate Real Estate, Vol. 6, No. 2, pp. 118-132. Institute of Real Estate Management, 2006. Transforming Real Estate Management. Four Strategic Issues. [Online] Available at: http://www.irem.org/pdfs/iremfirst/irem4issues.pdf [Accessed January 08, 2013]. Mansour, A. & Scott, B., 2012. U.S, Sale/Leasebacks: Unlocking Value. 2012 Special Report. [Online] Available at: http://www.cbre.us/AssetLibrary/US_Sale-Leasebacks_UnlockingValue_FINAL.pdf [Accessed January 08, 2013]. Morris, S., 2010. Practice Briefing: Sale and Leaseback Programme in Barclays. Journal of Property Investment & Finance, Vol. 28 Iss: 5, pp. 385 – 390. Ray, J. & Rowley, K., 2007. The Financial Advantage of Sale-Leaseback. Mechanic of the Sale-Leaseback. [Online] Available at: http://www.solutions-daily.com/mediaFiles/tririgawhitepaper_sale-leaseback.pdf [Accessed January 08, 2013]. Spark, F. & O’Brien, D., 2012. Sale and Leaseback – How it could Benefit Your Business. Colliers International. [Online] Available at: http://www.colliers.com.au/~/media/Files/Corporate/Research/Speciality%20Reports%20and%20Property%20White%20Papers/Sale%20and%20Leaseback%20White%20Paper%20-%20Spring%202012.ashx [Accessed January 08, 2013]. Tipping, M. & Bullard, R. K., 2007. Sale-and-leaseback as a British Real Estate Model. Introduction. [Online] Available at: http://www.fig.net/pub/fig2007/papers/ts_1c/ts01c_02_tipping_bullard_1201.pdf [Accessed January 08, 2013]. Bibliography Berg, M. M., 2005. “Real Estate Sales and Leasebacks.” Articles. [Online] Available at: http://www.mmblawfirm.com/publications/articles/realestate/2.htm [Accessed January 08, 2013]. Haight, G. T. & Singer, D. D., 2005. The Real Estate Investment Handbook. John Wiley & Sons. Read More