How Tenant Advisory Group Handles a Sale-Leaseback

Tenant Advisory Group is a Chicago-based commercial real estate brokerage founded in July 2008 by Bill Himmelstein. We represent tenants and buyers of office, clinical and industrial space in Chicago and nationally, and we do not represent landlords. Across the firm's work that adds up to more than 500 transactions and more than $1.5 billion in transaction value.

That background matters in a sale-leaseback because the seller becomes the tenant. The investor is buying a building and a stream of rent. Our client is the company that will pay that rent and operate under the lease long after the sale proceeds have been put to use. So we treat the lease as half of the negotiation from the first conversation, not as paperwork that follows the price.

The four steps below are the same ones described on our sale-leaseback service page. This guide explains what happens inside each.

We start with the business, not the building. A sale-leaseback is only useful if it serves a purpose the company can state plainly, so the first conversations cover your financial goals, your operational requirements and your future plans.

• ✓What will the proceeds be used for, and how much is needed after debt payoff, costs and taxes?
• ✓How long does the company expect to operate from this site?
• ✓Could the operation need more space, less space or a different layout during that time?
• ✓Is a sale of the company, a new partner or an ownership transition likely within the lease term?
• ✓What annual rent can the business carry comfortably, including in a weak year?
• ✓Who needs to approve the transaction: owners, a board, a lender?
• ✓How confidential does the process need to be?

We ask you to involve your CPA and real estate attorney at this point. The tax on the sale and the accounting for the leaseback depend on the facts and the structure, and those answers should shape the plan before any investor sees it. This is also when we say so if a sale-leaseback looks like the wrong tool, for example when the company is unlikely to stay at the site for long.

Next we evaluate the property: its location, its condition, its market value and its potential for appreciation. For a sale-leaseback that evaluation has to answer two questions an ordinary sale does not.

The first is what the building would rent for on the open market. Investors derive price from rent, so a realistic view of market rent tells us what price is supportable without loading the company with rent above what the building is worth to another tenant. The second is how an investor will view the building if your company ever leaves. A facility that many businesses could use is underwritten differently from one built around a single process.

• Physical condition, including the age of the roof, structure, paving and major systems, since the lease will assign responsibility for each.
• Environmental history and any reports on file.
• Title, survey and zoning matters that a buyer will examine.
• The existing mortgage, any prepayment charge, and restrictions in other loan agreements.
• The financial information an investor will ask for in order to underwrite the company as tenant.

Problems found now can be fixed, priced or disclosed on your terms. The same problem found by a buyer in the middle of due diligence becomes a reason to ask for a lower price.

With goals set and the property understood, we take the opportunity to investors in the way that fits your need for confidentiality, and we negotiate the terms of the sale-leaseback agreement: the sale price, the lease terms and any other conditions.

We negotiate price and lease in the same conversation, beginning with the letter of intent. Every lease term has a value to the investor and a cost to you, and the two can only be traded sensibly when they are on the table together. The lease items we press on include rent and escalations, the length of the term and renewal options, responsibility for repairs and replacements, rights to alter or expand, assignment and change of control, guaranties and deposits, and the condition in which the building must be returned.

Buyer selection is part of the negotiation. We look at an investor's ability to close, the approvals it still needs and how it is likely to behave as a landlord, alongside its price.

That client came to us by introduction from its bank while under financial pressure, and its transaction also involved environmental remediation. Every situation is different, and one client's experience does not predict another's result.

Closing means finalizing the sale and the lease agreement, transferring title to the property and setting up the lease payments. Between a signed letter of intent and that day, the buyer conducts due diligence and the attorneys turn the business terms into a purchase agreement and a lease.

1. We work with your attorney so the documents match the terms that were negotiated, and flag any drift.
2. We coordinate responses to the buyer's inspections, environmental review, title and survey questions.
3. We address requests to change the price or terms, using the preparation done in step 2.
4. We track lender payoff and any consents with your team so the mortgage can be released at closing.
5. We confirm that the rent commencement, payment instructions and notice addresses are in place for the first day of the lease.

Throughout, our aim is that the process is transparent and that you are fully aware of all the terms and conditions before you sign. You should never be surprised by a clause in your own lease.

It is worth being clear about limits. We are brokers, not lawyers or accountants. We do not give legal, tax or accounting advice, and we do not decide how the transaction is recorded on your financial statements. Under current US lease accounting a seller-lessee records a right-of-use asset and a lease liability for the leaseback, and the full accounting outcome depends on the facts, so that analysis belongs with your CPA.

We also do not promise a price or a timetable before we have seen the property, the financial statements and the market's response. What we commit to is representing one side only, yours, and negotiating the lease with the same care as the sale.