Scotsman Guide - February 2009 Commercial Edition

Selling — and Leasing Back — to Survive

Sale-leasebacks often allow business-owner clients much-needed flexibility

By David H. Steinwedell, managing partner, AIC Ventures

In slow economic times, solid companies often look for growth opportunities such as lower-cost acquisitions of faltering competitors or complementary businesses and shakeouts of weaker competition. But without readily available capital to fund such growth or acquisitions, companies’ momentum could stall.

If you have clients who need significant funds to fuel business growth, providing them with alternative solutions beyond offering debt can help. In fact, some alternative sources of capital are increasingly popular for small and middle-market companies. One such alternative is a sale-leaseback transaction. Working with sale-leasebacks and referring a qualified provider also can give you the opportunity to find another source of revenue for your own business while still meeting your clients’ needs.

In a sale-leaseback transaction, a company sells its existing commercial real estate assets to an investor and then leases the property back. This can help your clients generate substantial capital at an attractive cost without complex bank requirements or equity dilution. The company can then redeploy the freed-up cash

into higher-return investments, including developing new product lines, expanding existing capabilities, paying off outstanding debt or acquiring new assets.

Sale-leasebacks let businesses access their illiquid capital for key reinvestment purposes. Through a sale-leaseback, a company cashes in on its existing assets to help fund product launches or other growth-oriented initiatives that could be difficult without having enough liquid assets to use as collateral. It produces considerable, upfront capital without adding debt to the balance sheet.

When conducted by a private investment firm, the approval process often is shorter, more flexible and typically less involved than with more-traditional financing sources.

Many businesses do not view their real estate as an asset that can become liquid and support their business operations. You can help clients determine whether their property can be used in a sale-leaseback transaction.

Commercial real estate assets that are suitable for sale-leaseback funding must fit certain criteria. For example, investors typically look for a real estate asset that is

central to the business’ operations. Typically, office, industrial and manufacturing facilities are good fits.

The property’s location also is key. Investors typically prefer facilities in large cities with dynamic economies. If a company becomes insolvent during its lease term, the investor wants to feel comfortable that a new tenant can occupy the property.

But even areas of the country struggling with the residential real estate crisis remain attractive to commercial real estate investors. In fact, most major cities across the country retain long-term fundamentals for growth.

It’s important to do your homework when seeking a provider for potential sale-leaseback clients. Look at their track record of closing transactions, discretion with their investment capital, experience with the property type and ability to handle difficult situations, such as environmental issues, existing financing and multiple locations.

Unfortunately, some sale-leaseback providers overpromise in their initial commitment letters and negotiate the acquisition price down through to closing. Although this practice is not indicative of

the industry, you and your clients should be aware of its potential. To avoid its likelihood, check the company’s tenure, volume and references.

With a sale-leaseback, a property's full-market value is delivered in cash at closing, which helps small and middle-market companies move immediately on their reinvestment strategies. When exploring this solution for your business-owner clients, it’s important to understand all available options and to analyze all benefits and weaknesses to ensure a long-term, viable solution.

David H. Steinwedell, managing partner of AIC Ventures, has nearly 25 years of experience in investment management, transaction negotiation, asset management, property

rehabilitation, real estate investment banking and brokerage. He chairs AIC’s investment committee and leads acquisitions of properties for AIC Ventures’ sponsored funds. Reach him at (512) 382-8923 or davidsteinwedell@ aicventures.com.