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- 2. Sale & Leaseback and Build-to-Suit Overview 1 Two types of financing structures are available to release cash locked in real estate assets Sale and Leaseback Build-to-Suit • For built real estate assets that are being occupied by the business • Seller agrees to a long term lease for the asset • Enables monetization of real estate assets on the balance sheet while maintaining full operational control of assets • Lease terms dictated by seller/occupier • Development of a new real estate asset for occupier • Development cost is fully funded by third party real estate investor • Asset developed as per occupier’s requirements • Pre-agreed lease terms dictated by occupier • Dividend payout • Reinvestment in core business (expanding production lines, marketing campaigns, new outlets) • Debt repayment • Business Growth (M&A and organic growth) Release cash for
- 3. Sale & Leaseback Overview 2 How it works Corporate (Occupier) Real Estate Investor Occupier receives 100% of sale proceeds2 3 Investor leases the property back to the occupier under a long-term lease Occupier sells property to investor at fair market value 1 Occupier pays rent during the lease term4 Typical Sale and Leaseback Structure Asset Sale • Transfer ownership to real estate investor • Seller / occupier receives sale proceeds Asset Leaseback • Enter into a long term lease with the real estate investor • Flexible lease terms based on occupier’s requirements
- 4. Build-to-Suit Overview 3 How it works Typical Build-to-Suit Structure Corporate (Occupier) Real Estate Investor Investor develops the property as per the occupier’s specifications2 3 Occupier enters into a long term lease on the property Occupier prepares the specifications for the required development 1 Investor receives rental payments from the occupier 4 Asset Design & Development • Corporate occupier prepares design documents • The occupier prepares development specification • Investor builds the property and ensures that the development is in line with the occupier’s required specifications Lease Agreement • Occupier enters into a long term lease with the real estate investor for the property • Occupier pays rent to the investor as specified in the lease agreement
- 5. Sale & Leaseback and Build-to-Suit Overview Owning vs. leasing corporate real estate Occupiers (corporates) can choose to either own or lease their real estate space. The following are the pros and cons of each: Own Lease Vs. Pros Ownership No recurring payment liability Cons Costly – initial outlay required High opportunity cost – reinvesting in your core business Not accounted for in the company’s DCF valuation Pros Cheap No initial outlay required Tax deductible Full operational control Potential accounting ratio improvements Cons Fixed liability No ownership 4 Summary • Operational Efficiency: owning real estate assets for occupation purposes may not be financially efficient • High Opportunity Cost: owning occupied real estate has a high opportunity cost, the cost of using the locked capital to invest in the core business and generate higher returns • Increase Shareholder Value: unlocking the value in occupied real estate may result in improving shareholder value
- 6. Sale & Leaseback and Build-to-Suit Overview 5 Alternative Financing Corporates regularly require capital in order to fund their ongoing expansion and/or payout dividends/debt. Accordingly, corporates can seek capital from the following sources: Cheaper than equity financing Higher loan to value compared to debt financing Flexible terms up to 25 years Terms dictated by the occupier No dilution of ownership Rent expense is tax deductible Fixed liability Short tenor (5-8 years) Limited to 50-60% of the property value Additional security may be required Expensive Dilutes ownership Less voting power Debt Sale & Leaseback and Build-to-Suit Equity
- 7. Typical Lease Structure 6 Flexibility to match lease terms to business requirements Purpose Liquidate long-term assets, thus improving the balance sheet while retaining control over the property Tenant Usually strong middle-market to investment-grade corporate ownership or corporate holding companies. Triple-net leases (lessee pays all costs associated with the operation of the property) Rental Rates Calculated as a percentage of the purchase price or gross development value, usually with embedded escalations throughout the lease term Term Sale and Leaseback: 10 years and above Build-to-Suit: 15 to 25 year lease terms Options to include renewal periods Advance 100% of fair market value Property Freehold ownership. Ground leases are exceptions. Preferred Properties Residential, office, industrial, retail, medical and education. • Tenants have the flexibility to negotiate lease terms matching their business requirements: - Lease term - Rental rates and escalation pattern (ie. fixed or inflation indexed) - Payment frequency - Ability to sub-lease - Renewal options - Future improvements and/or property expansion - Buy-back options • Lease terms can also be adjusted to meet specific accounting considerations - Classification of capital or operating lease depending on local accounting regulations
- 8. Maintaining Control 7 Flexible buy-back options can be pre-agreed Sellers can maintain control over the asset by way of a variety of structures: • Long Term Leases: Leases typically run from 10 to 25 years with renewal options • Right of First Refusal: Lessee retains pre-emption right in the event the lessor wishes to sell the property during the lease term. • Sale Restrictions: In the case of strategic assets, restriction on sale of the property to direct competitors. • Buy-Back Options: The lessee retains an option to buy back the property during or at the end of the lease term. • Reversion at Lease Maturity: Ownership of the property reverts to the lessee at the end of the lease term • Land Lease Structure: Only the building is sold and the lessee retains ownership of the land which is in turn leased under a long term lease to the new building owner.
- 9. Selected Sale and Leaseback Transactions 8 Local and international companies increasingly relying on SLB transactions Seller Industry Assets Location Value Date Large Corporate Industrial 2 residential compounds Saudi Arabia $ 700m 2014 Time Warner Media Time Warner Center USA $1.3 bn 2014 GEMS Education GEMS World Academy UAE ca. $75-80m 2013 MMG Construction Headquarters Saudi Arabia $10 m 2013 Azizia Panda Retailer 5 supermarkets Saudi Arabia No Disclosed 2012 Nokia Electronics Headquarters Finland € 170 m 2012 Caixabank Financial Services 439 properties Spain € 428 m 2012 Medica Healthcare 15 healthcare centres France € 132 m 2012 Agrokor Food 8 stores Croatia € 35 m 2012 Peugeot Citroen Automotive 9 retail properties UK £ 30m 2012 Tesco Retailer 4 stores South Korea £ 300m 2012 Safi Danone Food HQ and distribution centre Saudi Arabia Not Disclosed 2012 Jarir Bookstores Consumer Goods 2 retail centres Saudi Arabia Not Disclosed 2011 Carrefour Retailer 97 supermarkets France € 365 m 2011 Metro AG Retailer 20 wholesale markets Italy € 400 m 2011 Azizia Panda Retailer National Distribution Centre Saudi Arabia $ 80 m 2010 Tesco Retailer 41 supermarkets UK £ 950 m 2010 NY Times Publishing Headquarters USA $ 225 m 2009 Laureate Education Education School campus USA $ 29 m 2008
- 10. JLL Can Help
- 11. How JLL Can Help 10 End-to-end service offering Existing RE Portfolio Review Transaction Structuring Asset Valuation Advisory Sourcing Equity and Debt Sources Identifying Developer (for BTS) Lease Structuring & Negotiation Transaction Closing JLL can advise on and manage the entire process on your behalf • As one of the world’s leading real estate investment advisory firms, JLL can help you structure and negotiate the most effective build-to-suit (BTS) or sale-and-leaseback (SLB) transaction to meet your financial and operational requirements: - Review your real estate portfolio and expansion plans and determine where the use of alternative financing structures make sense - Leverage JLL’s local, regional, and international investor network to source the most cost efficient financing sources - Structure a transaction that meets your needs and run a competitive process to achieve the greatest cost savings - Help structure and negotiate long-term occupational lease - Manage the entire process and liaise with other third party advisors until transaction closing
- 12. Why appoint JLL • Protects investor’s interests by ensuring full transparency, avoiding conflicts of interest, and ensures that transactions are conducted on an arms-length basis • Ensures full market coverage by leveraging JLL’s extensive relationships across investor groups and geographies • Your investment teams save time and continue to focus on your core business while JLL manages the process, answers questions, and acts as a single point of contact for all prospective investors • Creates competitive tension between investors Maximises sale proceeds
- 13. Thank You This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.