Negotiating the Leaseback: 10 Terms That Matter Most

Your negotiating strength in a sale-leaseback is highest while more than one investor wants the deal. It falls sharply once you sign a letter of intent with one buyer and agree not to talk to others. Any lease term left open at that point will be settled later, on the buyer's lease form, with no competitor in the room.

That is the reason for a priority list. Each term below should appear in the letter of intent in enough detail that the attorneys are documenting an agreement, not starting a new negotiation. The first four set what you pay. The next four set how freely you can operate. The last two cover the long term. Separate guides in this resource center go deeper on most of them.

Every lease term has a value to the investor. When a buyer asks for one, ask what it is worth in price, and when you ask for one, expect the same question.

• 1. Initial rent. Rent drives the price, so the two are set together. Anchor the rent to what the building would lease for on the open market. Rent above that level buys a higher price today and leaves you with an above-market cost for the whole term.
• 2. Escalations. Agree on how rent increases: a fixed annual percentage, a periodic step, or an inflation index, ideally with a cap. Write out the rent for every year. The number in the final year is the one that surprises people.
• 3. Term and renewal options. A longer initial term supports a higher price and commits you for longer. Match the term to how long you are confident you will need the site, then add renewal options so staying is your choice. Specify the notice period and how renewal rent is determined.
• 4. Repairs and capital replacements. Decide who pays to replace the roof, structure, parking areas and major building systems, especially near the end of the term. If those fall on you, seek limits: landlord responsibility for structural items, cost sharing based on useful life, or a credit for the condition at signing.

These four interact. A buyer may accept lower rent in exchange for a longer term, or take responsibility for the roof in exchange for a slightly lower price. Model the options as total cost over the same number of years before trading one for another.

• 5. Assignment, subletting and change of control. If you ever sell the company, bring in an investor or reorganize, the lease must allow it. Seek the right to assign to a buyer of the business or an affiliate without landlord consent, a reasonableness standard for other transfers, and clarity on whether a change in ownership counts as an assignment.
• 6. Alterations and expansion. You can no longer change the building at will. Secure the right to make non-structural changes without consent, a prompt and reasonable approval process for larger work, and a stated approach if you need the building expanded.
• 7. Guaranties, deposits and reporting. Investors may ask for a security deposit, a letter of credit, a parent or personal guaranty and regular financial statements. Each has a cost. Negotiate the amount, conditions for reduction or release over time, and confidentiality for the financial information you provide.
• 8. Surrender and restoration. Define the condition in which the building must be returned. Without limits, you could be asked to remove specialized improvements or equipment foundations at your expense. Agree now on what stays and what goes.

Term 5 is often underweighted by owners who have no plan to sell. Plans change, and a lease that requires the landlord's discretionary consent to a sale of the business hands the landlord a bargaining position in a transaction that has nothing to do with real estate.

• 9. Repurchase options and rights of first offer or refusal. Owners often want a path back to ownership. Investors tend to resist, since such rights can make the property harder to sell or finance. There is also an accounting consequence to check first.
• 10. Landlord sale and financing. The investor may sell the property or borrow against it during your term. Ask for a non-disturbance agreement from the landlord's lender so that your lease is honored if the lender takes over, confirmation that the lease binds any successor owner, and reasonable limits on the estoppel certificates and documents you must sign on demand.

On term 9, published guidance on ASC 842 explains that an option for the seller-lessee to repurchase the asset generally precludes sale treatment unless the option is at fair value and the asset is essentially a commodity, and KPMG notes that the exception applies only where the asset is not real estate. When sale treatment is precluded, the seller does not remove the building from its books and records the proceeds as a financing. A repurchase option on your building can therefore change your financial statements. Ask your CPA to review the exact wording of any repurchase, first-offer or first-refusal right before it goes into a letter of intent.

Before the letter of intent is signed, confirm that it answers each of the following.

• ✓Is year-one rent stated as a total annual amount, and have we compared it with market rent?
• ✓Is the escalation method stated, with any cap, and have we written out the rent for every year?
• ✓Are the initial term, each renewal option, the notice period and the renewal rent method stated?
• ✓Is responsibility for roof, structure, paving and major systems assigned, including replacement?
• ✓Can we assign the lease to a buyer of our business, and is change of control addressed?
• ✓What alterations can we make without consent?
• ✓Are the deposit, guaranty and reporting requirements stated, with conditions for release?
• ✓Is the surrender condition defined, including specialized improvements?
• ✓Has our CPA reviewed any repurchase or first-offer right?
• ✓Will the landlord's lender provide a non-disturbance agreement?

1. Rank the ten terms for your business. A company planning a sale cares most about term 5. A company with an old roof cares most about term 4.
2. Decide in advance which terms you would trade for price and which you would not.
3. Send every bidder the same term sheet so their responses can be compared.
4. Have your attorney review the letter of intent before signing, even where it is non-binding.

TAG negotiates these same terms for occupiers in ordinary leases. In a sale-leaseback we bring them into the letter of intent alongside the price and work with your attorney to carry them into the final lease.