How to Compare Sale-Leaseback Offers Side by Side

A sale-leaseback offer is a package: a purchase price and a lease that you will pay for years. Investors derive the price from the rent, so a buyer can raise its price simply by asking you to pay more rent, sign a longer lease, accept larger annual increases or take on more repair risk. Each of those moves shifts cost from the day of closing to the years after it.

Offers also arrive in different formats. One states rent as an annual figure, another per square foot. One assumes you pay all operating costs, another leaves the roof with the landlord. Until the offers are restated on the same basis, comparing them is guesswork.

The work is to convert each offer into two numbers you can trust, cash you keep at closing and cash you pay out over a common period, and then to weigh the non-financial terms that decide how much freedom you have as a tenant.

Ask every bidder to respond to the same term sheet. Where they do not, restate their terms yourself and confirm your reading with them in writing.

1. List the purchase price, the deposit, and any holdbacks or escrows that reduce cash at closing.
2. Record year-one rent as a total annual dollar amount, and note exactly what it covers.
3. Write out the rent for every year of the initial term using the stated escalation, whether fixed, tied to an inflation index, or both.
4. Note the initial term and each renewal option, including how renewal rent is set.
5. Record who pays for taxes, insurance, maintenance, and replacement of the roof, structure, parking areas and building systems.
6. Record the credit support requested: security deposit, letter of credit, corporate or personal guaranty, and financial reporting.
7. Record the due diligence period, financing or committee approvals still needed, and every condition that lets the buyer terminate or renegotiate.
8. Estimate net proceeds for each offer after mortgage payoff, prepayment charges, transfer taxes, closing costs and the tax on any gain. Your CPA should supply the tax estimate.

Once the grid exists, differences that were buried in the documents become visible, and you can ask bidders to close the gaps.

The following example is hypothetical, for illustration only. The figures are round numbers chosen to show the arithmetic. They are not market data and do not indicate what any building would sell or lease for.

• Offer A: purchase price of $10,000,000, year-one rent of $750,000, rent increasing 3 percent each year, 15-year term.
• Offer B: purchase price of $9,400,000, year-one rent of $680,000, rent increasing 2 percent each year, 15-year term.

Offer A pays $600,000 more at closing. Over the 15 years, though, rent under Offer A adds up to about $13.9 million, while rent under Offer B adds up to about $11.8 million. The seller would pay roughly $2.2 million more in rent to receive $600,000 more in price. By the final year, annual rent is about $1.13 million under Offer A and about $900,000 under Offer B.

Those totals are simple sums. A finance team should also discount the rent streams to present value at the company's own cost of capital, because a dollar of rent in year 15 weighs less than a dollar of price today. In this illustration, discounting at rates between 6 and 10 percent narrows the rent gap to roughly $1.0 million to $1.3 million in present value, which is still more than the $600,000 difference in price. The reverse can also be true: a company with a high-return use for cash may rationally prefer more proceeds now.

Always run the comparison over the same number of years. An offer with a shorter term looks cheaper in total rent only because it stops counting sooner.

Several lease terms never appear in a price-and-rent summary but carry real money.

• Capital repairs. If you must replace the roof or the parking lot at your own cost late in the term, add a reserve for it. An offer that leaves those items with the landlord, or spreads their cost over their useful life, is worth more than its rent suggests.
• Escalation type. A fixed increase is predictable. An index-based increase without a cap transfers inflation risk to you.
• Renewal rent. Options at a fixed schedule give certainty. Options at fair market value need a clear appraisal method to be useful.
• Assignment and change of control. If a future buyer of your company cannot take over the lease without landlord consent, the lease can slow or reprice the sale of your business.
• Credit support. A large deposit or letter of credit ties up cash you just raised. A personal guaranty puts owners behind an obligation the company should carry.
• Surrender obligations. A duty to remove specialized improvements at the end of the term is a deferred cost.

Accounting can differ between offers as well. Under US GAAP, an option for the seller to repurchase real estate generally prevents the transaction from being recorded as a sale, in which case the proceeds are treated as a financing. KPMG also notes that a seller-lessee adjusts its accounting for off-market terms, which is relevant when the price or rent has been set away from market levels. Ask your CPA to review any offer with a repurchase right or unusual pricing before you rank it.

An offer is worth its terms multiplied by the chance it closes on those terms. Some buyers bid high to win exclusivity and then seek a reduction during due diligence, once other bidders have moved on.

• ✓Has this buyer shown proof of funds, or does the purchase depend on a loan that is not yet committed?
• ✓What internal approvals remain, and who gives them?
• ✓How long is the due diligence period, and what can the buyer terminate over?
• ✓When does the deposit become non-refundable?
• ✓Has the buyer reviewed our financial statements and environmental reports already, or will its first look come after we grant exclusivity?
• ✓Will the buyer accept our form of lease as the starting document?
• ✓Does the buyer intend to hold the property or resell it soon after closing?

We prepare this kind of grid for our clients and take the open questions back to each bidder, so the final choice is made between offers that have been made comparable and pressure-tested, with the lease terms weighted as heavily as the price.