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FINANCING THE SALE AND LEASEBACK TO RAISE CASH
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7 Park Avenue Financial
South Sheridan Executive Centre
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Oakville, Ontario
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The Sale-Leaseback transaction in Canada. How can this unique aspect of asset financing in Canada be utilized for maximum benefit? Some might say that it depends on which side of the transaction you are on - borrower or lender. From our perspective, it's a two-way street. Properly executed for the right reasons, it becomes... excuse the sometimes overrated term... a win/win.
WHAT ARE THE 2 MOST POPULAR ASSETS TO REFINANCE UNDER SALE LEASEBACK TRANSACTIONS
Let's examine some key aspects of leaseback transactions for 2 major asset classes - Equipment and real estate. It’s all about access to alternative capital without giving up use and long-term ownership of key assets from the lessee's perspective. In recent years, many companies and even financial institutions have focused on shedding 'non-core' assets to employ capital for maximum ROI. A good example? Witness Canadian banks employing the lease back on prestigious bank office towers.
HOW DOES THE SALE LEASEBACK WORK?
Fundamentally the transaction is simple - Sell an asset to a third party, leasing it back with the option or ability to repurchase it at the end of the lease term.
What then is achieved from the borrower’s perspective? As we have noted, it's a redeployment of capital into other areas of the business. Depending on the transaction's value and original structure, this financing method can affect key operating and capital ratios - they include debt/worth, current asset ratios, etc.
WHY CONSIDER A LEASEBACK?
Borrowers consider leasebacks for working capital, technology upgrades; in certain cases, it might be prudent to structure a transaction as a term or bridge loan based on specific issues surrounding the deal. For the lessor, of course, it's the benefit of a guaranteed income stream.
WHAT ARE INTEREST RATES ON SALE LEASEBACKS
Financing rates/ your interest rate play a key role in the overall background to any transaction of this king. The effect must be any original financing remaining on the asset, current rates, and any tax effects related to the deal. Sale leaseback accounting implications should always be considered.
THE OPERATING LEASE SCENARIO
Many owners and financial managers in any company considering a lease transaction are often confronted with ' pride of ownership ' issues which must be properly rationalized. And looking at it from the lessors perspective, it is clearly important to ensure the transaction is not viewed as the proverbial ' cash grab. ' Simply speaking, it is prudent for the lender to satisfy itself around proper use of the proceeds of the deal.
LET 7 PARK AVENUE FINANCIAL ADDRESS YOUR LEASEBACK NEEDS
We note that not all lessors, banks, etc. offer leaseback financing. In some cases, their charter prohibits any financing of this type. In other cases, the owner/management at a lending institution has decided they don't the expertise or risk appetite revolving around a lease back. Charters of many organizations often specifically prohibit this method of refinancing. Niche players in the industry often include firms with both financing and asset expertise - with many firms have key personnel with in-depth liquidation expertise in all categories of assets.
THE COST OF REFINANCING
Rates vary on this method of financing. It should be no secret that the ever-present issues of ' credit quality and ' asset quality ' are ever-present in your lease agreement or any transaction of this type when it comes to lease payments and proper structuring of your transaction.
CONSIDER THESE KEY ISSUES IN YOUR LEASEBACK ARRANGEMENT
Some other considerations for borrowers might include the ability to return capital to owners and shareholders. Management that typically might be incented by key ROI and ROI metrics often look to the sale-leaseback of assets as a method of ensuring the attainment of corporate objectives. When refinancing interest rates align with corporate capital, conditions for a sale-leaseback are viewed as favourable.
Lessors have the potential ability to offer both capital and operating leases as part of their financial offering in this segment of asset finance. Technology lessors make maximum use of the operating lease vehicle - allowing clients to maximize operating expense deductions, balance sheet enhancement, etc.
ENSURING YOU HAVE COVERED OFF ALL THE BASES
We've focused mainly on the key benefits and considerations of the borrower. From the asset lender's perspective, leaseback finance offerings necessitate marketing, legal, and due diligence expertise. Lease contracts must be specifically designed to reflect the essence of the leaseback. Key issues such as corporate searches and PPSA issues must be tabled and addressed at the start of any negotiation. In essence, the leaseback must be properly ' papered ' to reflect the lessee's asset and financial obligations concerning rent payments/lease payments and the cash flows in your transaction.
VALUING THE ASSET
As noted, asset valuation for refinancing is key. It becomes prudent, almost mandatory, to engage asset appraisal expertise as the cornerstone of any successful transaction. Different asset categories have different intricacies, and the original purchase prices are only a small part of the current strategy. It's all about a real estate investment versus fixed assets or plant machinery in many transactions.
The proliferation of information via the internet has greatly helped owners and lenders determine true asset value to refinance. Market data on almost any asset can be precious in initial negotiations around deal value and risk pricing... and these days, that data is literally up to the minute. Solid appraisals can significantly benefit key issues such as book value, fair market value, impairment, etc.
Key aspects of any appraisal include opinion, value, methodology, assumptions and pictures or videos.
We've observed over the years that many lenders rely solely on relationships they have built with specific appraisers. This is much to the lessee's chagrin who has recognized the need for a third-party valuation, only to find that a commercial lessor or bank does not recognize the appraisal firm they used. Bottom line? Money spent... unwisely!
WHAT ARE THE DIFFERENT TYPES OF APPRAISALS
By the way, safe to say also that we have never run into a situation where owners of assets have undervalued an asset in their own minds! That comment specifically relates to a key technical issue in asset valuation in the leaseback agreement - i.e. the type of appraisal utilized or required by the lessor. Key categories in this area are fair market value, orderly liquidation, and forced value liquidation. By the way, lessors typically lend against a percentage of forced value, highlighting the difference in owners perception of true asset value.
CONCLUSION
Looking to explore the benefits of sale leaseback financing? The real secret to a seller lessee transaction and the proper refinancing via a sale-leaseback strategy is due diligence as the lender and an informed borrower/lessee around the leaseback process. Whether you're a lender or borrower, that final decision will become a much easier one and absent of surprises. Seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor
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Stan Prokop
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