How to Prepare Your Building and Financials for a Sale-Leaseback

Investors price what they can verify. When a building comes to market with a clear ownership record, documented condition, organized financial statements and a defined lease, bidders can commit to a firm price quickly. When those things are missing, bidders either stay out or submit an offer with room to cut later. Preparation also protects your time. A deal that stalls in diligence consumes months of management attention and can leave the property looking damaged if it returns to market.

Preparation is also where you decide what you want. A sale-leaseback is two negotiations, a sale and a lease, and owners who have not thought through the lease tend to focus on price and accept the buyer's form. The steps below are in roughly the order we work through them with clients.

Start with the business, not the building. Write down what the proceeds will be used for and how much is needed after repaying debt, taxes and transaction costs. Decide how long you are confident the company will operate from this site. Identify what would make the transaction not worth doing: a rent level the business cannot carry, a lease term longer than your planning horizon, or a personal guaranty.

• ✓What specific use do we have for the proceeds, and what will it return?
• ✓What net amount do we need, after the mortgage payoff and all costs?
• ✓What annual rent can the business carry in a weak year?
• ✓How many years are we sure we want to be at this location?
• ✓Do we expect to sell the company, bring in investors or transfer ownership during the lease?
• ✓Do all owners agree, and who has authority to sign?

These answers become the brief for everyone else on the team and the test against which offers are measured.

Three conversations should happen before any investor sees the property.

• Your lender. Ask for a payoff figure on any mortgage, including prepayment charges, and ask how a sale of the building and a new long-term lease would be treated under your loan agreements and covenants. Some credit facilities require consent to sell a major asset or direct how proceeds are applied.
• Your CPA. Ask for an estimate of the tax on the sale and of how the transaction will be reported in your financial statements. Both depend on your facts and should be modeled before you fix a target price or rent.
• Your real estate attorney. Confirm who legally owns the property, what approvals are required to sell it, and whether any existing agreements restrict a sale.

Owners sometimes hold the building in a separate entity that leases to the operating company. That is common and workable, but the ownership of the two entities may differ, and the people who receive the sale proceeds may not be the same people who will bear the new rent. Resolve that among the owners first.

Assume the buyer will examine title, survey, environmental history and physical condition, and look at each yourself first. Our guide on buyer due diligence explains what those reports cover. For preparation purposes, the work is practical.

1. Collect existing documents: deed, owner's title policy, surveys, past environmental reports, permits, certificates of occupancy, warranties and service contracts.
2. Have your attorney run title and clear old mortgages, liens and entity problems.
3. Confirm with counsel how to approach environmental review, particularly if the site has an industrial history.
4. Walk the building with someone qualified and list roof, pavement, mechanical and life-safety issues.
5. Close open permits and correct known code items.
6. Decide which repairs to make now and which to disclose and price.

Do not over-invest. The aim is to remove surprises and inexpensive objections, not to renovate. A major capital project just before a sale rarely returns its cost unless the item would otherwise block the deal.

The investor is relying on your company to pay rent for many years and will ask for financial information to judge that. Assemble it before it is requested: several years of financial statements, current year-to-date results, and a brief explanation of anything unusual. Work with your CPA on a view of the company after the transaction, showing the debt repaid and the new rent in place, so investors and you are looking at the same picture.

Decide which entity will sign the lease and whether any parent or affiliate will guarantee it. If the statements you have are for a consolidated group and the tenant will be a single subsidiary, expect questions, and have an answer.

Have a confidentiality agreement ready before the first inquiry. Financial statements should go only to investors who have signed it, and in stages.

The most valuable preparation step is also the one most often skipped. Before offers arrive, write a term sheet for the leaseback from the tenant's point of view. When your terms are part of the offering, every bidder prices the same lease, and you can compare offers directly. When they are not, each bidder assumes its own lease, usually the most landlord-friendly version, and the price you accepted turns out to depend on terms you never agreed to.

• Initial term and renewal options that match your operating horizon.
• Starting rent, tested against market rent and against affordability.
• Rent escalation method.
• Who is responsible for roof, structure and capital replacements.
• Rights to alter, expand, assign and sublet.
• Credit support you are and are not willing to give.
• Surrender and restoration terms, including treatment of existing specialized improvements.

Get an independent view of two numbers: what the building would lease for on the open market, and what it is worth as real estate. Together with your term sheet, these let you set expectations for price and recognize an offer that reaches its number by loading rent onto the business.

Then decide how to approach investors: a broad marketed process, a targeted approach to a short list, or a response to an unsolicited offer. Each has different implications for confidentiality and competition. Decide also who inside the company knows and when employees, customers and suppliers should hear. A building sale can be misread as a sign of trouble if the news arrives without explanation.

Our process begins with understanding the company's needs and objectives and evaluating the property, before any buyer is approached. In practice that means working through the steps above with you: testing rent and value, drafting the tenant-side lease terms, identifying issues to clear, and coordinating with your attorney, CPA and lender. We represent the occupier, the party that sells once and then lives under the lease, so the lease receives as much preparation as the price.

An owner who starts early has choices. The same owner under a lender's deadline has fewer. If a sale-leaseback is a possibility in the next year or two, the low-cost preparation, title, documents, financial statements and a clear view of value, is worth doing now.