Sale & Leasebacks: Cash in a Crisis

The New Zealand Government today announced new measures to help business through the COVID-19 crisis, in addition to the $12bn Economic Response Package announced back in March. Businesses will be very appreciative of these measures but are there other things that companies could be doing themselves to help cash-flow and improve stability over a longer-term horizon?

Bradbury Building LA - unrelated to the article but beautiful to look at.

Over the last couple of years one of the key challenges for commercial property investors has been access to stock. This "shortage" has been driven by the sheer volumes of capital looking for yield in a low interest rate environment. In a domestic context NZ investors have faced competition from new global operators such as Blackstone who acquired a $635m office portfolio in 2018/19, and many other private overseas investors who have been active in our markets. The current crisis could help this shortage problem by bringing to market new stock through sale and leasebacks, and in turn the capital released could shore-up company cash flows, help repay debt and help them survive the crisis.

A sale & leaseback, full or partial, simply concerns a business selling the property, from which it operates, to a purchaser and then leasing back the property to become a tenant. The mechanics are relatively simple - the price a business can achieve for its property will be driven by the terms and conditions of the lease agreement, such as rent rates and lease lengths, and market conditions in terms of sector, occupancy demand, vacancies etc.

Investors will also look to the strength of the "tenant" and on the face of it it might appear counter-intuitive to participate in this type of transaction when the implication from a sale & leaseback is that the tenant is under some stress. But, whilst tenant strength or "covenant" is especially relevant at present it's also part of the risk analysis process always undertaken and is reflected in the price paid, or compensation for the risk accepted, by the purchaser.

Sale and leasebacks are just one option that might be considered to help business through these difficult times, but as with any transaction appropriate professional advice should be obtained and careful risk balancing, and appropriate transaction structuring will be required.

To learn more about how we can help with sale and leasebacks please contact;

Toby Scott

Tel: 027 5299 879

Email: toby@tascott.co.nz