SALE LEASEBACKS
Get Cash & Still Control Your Municipal Real Estate
Using Sale/Leasebacks
Sale/Leasebacks are situations in which a municipality (“Muni”) or other government entity transfers a property it owns through a sale for cash and simultaneously executes a lease on the same property. Sale/Leasebacks are both a financial and real estate transaction that allow a community, county, or state government to capitalize on its creditworthiness.
Why Communities Use Them
Sale/Leasebacks allow a Muni to productively use the capital that would otherwise remain locked up in its real estate assets. If a Muni believes it could better use the capital tied up in a city hall building, court house, university, police and fire states, etc. for operating expenses, balances the budget, or for improvements to the community or for other financial obligations, Sale/ Leasebacks could be the perfect solution.
Often communities are surprised to discover that the value of their real estate equity and cash from Sale/ Leasebacks can be used to finance and pay for unexpected unemployment or health care expenses, police, fire, and other social services, or make improvements to existing buildings or community infrastructure.
Sale/Leasebacks have also proven effective in bridging budget gaps and increasing bond ratings and capacity. Notably, the capital from Sale/Leasebacks can be used in any way the Munis wishes. In today’s economy, this flexibility can be critical.
How Sale/Leasebacks Work
By way of example, let’s say a Muni requires funding to pay for unexpected unemployment benefits and other social services. A Sale/Leaseback transaction to obtain funds needed for the municipal improvements includes the following steps:
The Muni would sell the property to a LemRx or one of its partners for fair market value based on:
-
A 15 -20 year lease or more with modest annual rent increases and a starting fair market value rent.
-
The entire process would be concluded within 60 – 120 days at minimal cost and risk.
-
The Buyer would collect the rent specified in the agreement while the Muni would gain budgetary stability with established rent costs for the term of the lease
-
The Muni could then use the proceeds from the sale to pay for unemployment or health care expenses, police, fire, and other social services, or make improvements to existing buildings or community infrastructure.
Sale/Leasebacks vs. Bond Financing
Traditionally, Munis have raised funds by issuing bonds. Sale/Leasebacks are not intended as a replacement for issuing bonds but as an alternative to be used when and where appropriate. As is the case with bond financing where the community must pay off the bond, however, given reduced credit rating for many Munis, bond repayment insurance could be cost prohibitive.
In a sale/leaseback, the Muni must make lease payments, however, the Muni would also have a huge “lump sum” amount of cash to work with immediately upon the sale/leaseback of a Muni owned property. The Muni could also invest a portion of the money it received from the sale of the property to pay for much needed expenses and to balance their budgets.
Sale/Leasebacks also have other advantages over bond financing because Sale/Leasebacks:
-
Eliminate the cost of an election and advertising.
-
Avoid the risk of voter disapproval of the referendum.
-
Replace the repayment of bonds and fluctuating interest rates with predictable monthly payments.
-
Sidestep the slow bond issuance process with its various overhead and hidden costs.
-
Circumvent complex trustee, compliance and insurance fees.
-
Provide uninterrupted possession of a property with a leasehold interest.
Unlocking Municipal Assets:
For decades, Fortune 500 corporations have used Sale/Leasebacks as a financing vehicle for a variety of reasons. Corporate executives have long viewed the sale and subsequent leaseback of their facilities as a means of accomplishing specific financial objectives while maintaining control and use of the real estate.
This process allows the corporation to sell brick, mortar, and dirt for a price in excess of their unleased value. If a company wishes to show increased productivity, Sale/ Leasebacks could be very helpful. Many corporations measure their productivity by calculating a return on assets. Sale/Leasebacks also potentially allow the corporation (or Muni) to reduce the assets shown on their balance sheet. Consequently, the corporation’s rate of return (earnings divided by assets) increases if there are less assets on the balance sheet.
The objective for Sale/Leasebacks could simply to show increased earnings, which is accomplished by converting equity in the form of buildings with little or no debt into CASH that may be needed for business expansion or other purposes. Sale/Leasebacks provide an opportunity to raise cash while maintaining operating control of the property as if the property were still owned by the corporation.
Conclusion
Sale/Leasebacks are a viable way of raising money quickly while maintaining control of your assets. To determine if Sale/Leasebacks are a feasible or optimal option, it is essential to engage the assistance of experienced real estate negotiators with no conflict of interest to work with your real estate, legal, and financial departments or consultants. Please call or email us anytime for a quick no obligation discussion about your Muni’s particular situation.
A Woman & Minority Owned Business Enterprise
Specializing in Municipal Owned Real Estate