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June 2010 |
Miller, Rubenstein,
Hoffman & Hawkinson
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Is the Time Right for a Sale-Leaseback?
 A sale-leaseback is a form of commercial real estate
transaction that involves an owner/occupant selling its property to an investor in exchange for signing a lease to remain a tenant in the building.
The owner (soon to be tenant) typically signs a long-term, triple-net (NNN) lease, which means it operates the building as if still owning it. This means they still pay taxes, insurance and other operating expenses.
Today's lending climate can make it challenging for owner/occupants to finance their buildings. And when they do, they often cannot finance 100 percent of their capital costs. A sale-leaseback, however, actually involves an outright sale
of the property, resulting in the seller/tenant potentially receiving a larger influx of cash than a traditional loan could provide. That cash can then be used to fund growth plans and stabilize operations.
Sale-leasebacks do not have to be limited to a single property, either. An owner/occupant could structure such a transaction to include a number of company facilities under a single or multiple leases, which would encourage an assessment
of existing real estate commitments and help in determining future occupancy decisions.
Unlike loan proceeds, the income from the sale-leaseback is subject to income taxes; so there are some drawbacks to this type of transaction. In addition to having to get landlord approval for renovations and other physical alterations,
your rent could be more than a comparable mortgage payment. Therefore, the tenant's established familiarity with the property and the cash infusion should be weighed against potential financial and operational discrepancies, among other
factors.
It is also crucial that the owner/occupant include renewal rights in the new lease. Having to renegotiate down the road for the right to stay could mean significant rent increases, as well as a host of typical tenant-landlord negotiation
issues that are better addressed upon initial execution of the lease.
Sale-leasebacks are simple in scope but require significant strategic planning. While the influx of cash is certainly an attractive component of a sale-leaseback, from an accounting standpoint, sale-leasebacks can become quite complex in
terms of income reporting and balance sheet treatment. Thus, if considering a sale-leaseback, your real estate strategy team should certainly include a high-level accounting professional.
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Smaller Market Relocations Can Strengthen Business
 Whether driven by the recession or a new awakening to
basic business math, more companies are relocating part or all of their operations to small and mid-size metropolitan areas, altering a trend that has long favored major cities.
Business leaders have discovered that securing office or manufacturing facilities in areas that have long been considered "second-tier" sites can substantially reduce operating costs without sacrificing product or service quality.
Additionally, areas hungry for job growth are often prepared to offer attractive tax-based relocation incentives that can produce years of savings.
Other features of mid-size markets include a labor force less likely to be pulled away by competing entities (increased loyalty) and a more concentrated pool of qualified workers prepared to fill more than administrative or manufacturing
jobs. The recession has literally shaken up the nation's workforce, scattering qualified workers across the country and thinning out the ranks in places like New York City, Los Angeles and Chicago.
Not long ago, Orlando became a hotbed for national customer service operations. However, increasing competition spread the talent pool, consequently increasing turnover and negatively impacting labor costs. By moving to a lower tier metro,
like Nashville, Rochester, NY or Detroit, a company can often reduce labor and operating expenses by 20-30 percent.
Other considerations for setting up shop in a Tier I or II market are the availability of technological resources, like broadband; easy to use mass transit; and smaller, more convenient airports. And clearly, a lower cost of living would
be a highly attractive draw for relocating employees.
There is no need to plan a mass exodus from your big city office, as there are still a number of reasons to maintain a presence in a large urban district. But if your business can use cheaper occupancy costs and a more loyal workforce,
maybe it's time to pull out a map. And some darts.
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New Technologies Making Green Building Solutions Easier
 Case studies continue to show that landlords can realize
return on green and energy-saving technology investments quicker than previously thought only a couple of years ago, both in dollars saved and public image. However, despite the growing demand by tenants for energy-saving improvements,
limited capital is hampering the pace at which improvements that include such technologies can be financed and implemented, bolstering landlord apprehension.
Thankfully, there is no slowing the pace of innovation, as new and established building material companies across the country are demonstrating that commercial real estate can go green without breaking the bank.
Bonded Logic, a California insulation company, has developed UltraSoft Natural Cotton Insulation, an insulation product made of 90 percent post-consumer denim and cotton recycled fibers that is without chemicals, requires no use or
handling warning labels, is fungi resistant and meets the highest smoke and fire ratings of the American Society for Testing and Materials (ASTM). A side-by-side comparison shows that UltraSoft is superior in almost every category to
standard fiberglass batting products.
Considered a sustainable alternative to traditional wood floors because of how quickly the trees reproduce, bamboo floors are growing in popularity. A company called Plyboo has created a product with no added formaldehyde that can be
naturally tinted through baking, which caramelizes the wood's sugars, turning it different shades of amber.
Recognized as an innovator in exterior construction materials, Presto Geosystems is now marketing Filterpave, a porous pavement system to eliminate the problems caused by water run-off and heat reflection so common with traditional paving
systems. The product is made of recycled glass that allows water to pass through it instead of over it, so it can be collected by the soil underneath or collected in a stormwater storage system. The glass comes directly from the bottles we
put into landfills.
There is little doubt that the nation's portfolio of commercial real estate represents one of our best opportunities to foster new technologies and embrace trends that can lead to drastic improvements in how we use fossil fuels. As more
energy-saving and recycled material technologies reach the marketplace, the more feasible it will be for landlords to consider their implementation.
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