Sale-Leasebacks for Companies With Multiple Locations

Before you think about structure, decide which buildings you would actually be willing to commit to for many years. A sale-leaseback need not include everything. Owners with several sites can sell some and keep others, then put the capital into their stronger locations.

A simple sort is useful.

• Core sites: you are confident you will need these for the full lease term. These are natural candidates.
• Good but replaceable sites: useful today, with alternatives if things change. Think carefully about how long you commit.
• Weak or uncertain sites: you may close or move these. A long lease on such a site can be costly, so these may be better sold outright, kept, or put on a shorter lease.
• Strategic holdings: buildings you want to keep for expansion, or because they may appreciate.

This sort matters more than any legal term that follows. A long lease on a site you plan to close is an obligation that the proceeds do not erase.

• One by one: each sale can go to the buyer that values that building most, on its own timing. You can stop after one or two if you have raised what you need. On the other hand, you have several sets of negotiations, closings and landlords, and your strongest sites may draw far more interest than the weakest.
• As a portfolio: a single sale can raise more capital at one time and may reach buyers who want larger deals. You deal with one landlord and one set of documents. On the other hand, buyers may discount the weaker sites, a problem at one site can hold up the group, and your exposure to one landlord is larger.
• A mix: some companies sell groups of sites to different buyers, or sell the core locations first and leave the others for later.

Diligence multiplies with each location. Every building needs its own title, survey, environmental and condition review, so a portfolio sale is more work to prepare. Time spent gathering records before going to market is especially valuable here.

A master lease is one lease that covers several properties, with one rent obligation across all of them. An individual lease structure uses a separate lease for each site. Investors may prefer the master lease because it gives them security: you cannot easily keep the strong sites and walk away from the weak ones. Law firm Bass, Berry & Sims treats this choice, along with cross-default and go-dark rights, as a central issue in portfolio deals, and notes that the flexibility provisions should be settled at the term sheet stage.

• In favor of a master lease: it may improve pricing or broaden investor interest, and you have one set of terms and one lease to administer.
• Against a master lease: your sites become tied together. If you later want to close, sell or relocate one location, the lease may not allow it without the landlord's agreement. A default at one site can reach the others.

That second point is real. One public company warned in a securities filing that a breach at a single facility could subject multiple facilities under the same master lease to the same default risk. Whether it applies to your deal depends on the wording, so have your attorney review it.

Business changes over a long lease. A location that works today may not in ten years. Here is how the structure changes the outcome, in an example that is hypothetical, for illustration.

A company sells six sites under one master lease at $1,200,000 of total annual rent, with $200,000 allocated to each site. Five years later, one site is losing money. Under a master lease with no release right, the company can close the store, but the $1,200,000 rent continues. Under six separate leases, the company still owes $200,000 a year on the closed site, but it can try to sublet or negotiate that lease by itself, and the problem is less likely to spread to the other five.

Neither structure lets you simply walk away. The rights that create room to adapt are ones you should ask for up front:

• Substitution right: the ability to swap one property for another of comparable value, subject to conditions. Multi-site tenants often seek this, and the landlord will want to protect the portfolio's value and security.
• Release right: the ability to remove a site, usually with a payment, a price formula or a replacement.
• Go-dark right: permission to stop operating at a site. It does not generally end your rent obligation unless the lease says so, but without it, the lease may require you to keep operating.
• Lease separation or severance: the ability to split a site out into its own lease, for instance when selling that location or business unit. Ask who holds this right, you or the landlord.
• Subletting and assignment: the ability to pass a closed site to another operator, and whether you remain liable.

Under a master lease, total rent may be allocated across sites, and those allocations can seem like mere paperwork. They are not. They may set the price of removing a site, the amount of a property's rent abatement after a casualty, and the rent attached to a location if it is sold or the lease is split. If a weak site carries a high allocation, removing it costs more. Investors may look at each location's results as well, and you should run the same check: does each site earn enough to carry its share?

• ✓Which sites do we need for the full term, and which might we close?
• ✓Should uncertain sites be left out of the deal altogether?
• ✓Does the proposed rent allocate fairly across sites, based on what each actually earns?
• ✓Can we substitute, release, sublet or close a site, and at what cost?
• ✓Would a default at one site reach the others, and do we get notice and a chance to cure?
• ✓Do our loan agreements restrict the sale, or treat a lease default as a loan default?
• ✓If we sell a division or a group of stores later, can the related sites be separated with it?
• ✓Do renewal options apply to each site, or is it all or nothing?

1. Rank your sites by long-term need and by how much each earns.
2. Talk to your lender and your CPA before you decide what to sell.
3. Decide how much capital you need, since it may not take the whole portfolio.
4. Prepare property files for each site you might include.
5. Ask buyers to quote both ways, as a group and individually, if the structure is open.
6. Compare any pricing benefit of a master lease with the cost of lost flexibility.
7. Write the substitution, release and separation rights into the letter of intent.

TAG represents the occupier in these transactions and also works nationally. Our job in a multi-site deal is to help you see which sites belong in the sale, then negotiate the structure so your real estate can change as your business does.