Backleasing, Backsliding, Boom or Bust
Cell C, South Africa’s third Cellular operator is now a tenant in 960 towers that they used to own! Huh? It’s true, it’s called a sale-leaseback or backleasing and that’s an investment that may interest you.
American Tower Corporation purchased, through its South African subsidiary Helios, 329 more telecommunications towers from Cell C for R965 million bringing the total to 960. American Tower will is acquiring up to 1,800 additional towers currently under construction..
Cell C is now an anchor tenant on each of the towers purchased, and its relationship with American Tower is enabling it to further enhance the quality and coverage of its cellular network.
So what exactly is a sale-leaseback when it’s at home in front of the fire? A sale leaseback option allows a company to sell its assets and lease them back simultaneously. This can be beneficial for businesses that are in need of an inflow of capital.
This practice isn’t new at all. In France it’s been popular for over thirty years. In other Western economies it’s widespread and its trends generally flow from the US.
Originally, sale and leaseback transactions were only applied to tangible assets, such as property, plant, machinery and equipment. However, since the mid–1990’s, its application has increasingly been extended to incorporeal property, including trademarks, patents, designs, copyright and know-how. When applied to intellectual property, the leaseback and associated rental payments are more correctly referred to as licence and royalties, respectively. But we’ll focus on leasebacks in property in this article.
Looking at world trends first: sale-leaseback’s in the US were at their highest in 2007 when $16.1 billion in sale-leaseback properties traded hands. Transactions have increased over the past 18 months. After hitting a low of $3.7 billion in 2009, nearly $4 billion in sales closed last year and another $2.6 billion had occurred this year so far.
In the US a set of rules was set up to guide such transactions by the Financial Accounting Standards Board in 2003. Crafted after the Enron disaster to force most off-balance-sheet financing back onto the books, these rules are expected to encourage many companies to convert, once popular, but now discredited, “synthetic leases” by which companies maintained control of the property while gaining tax benefits, into more legitimate “true leases,” such as sale-leasebacks and net-leases.
Companies mainly used synthetic leases as a way to keep real estate debt off the balance sheet while reaping all the other benefits of owning real estate. (A synthetic lease is when the money to finance the asset is borrowed, and the lender takes a security interest against the asset, but has no further recourse against the borrower / operating company.)
There are instances in which prioritising the use of an asset is more important than wanting to own it. Usually in these situations liquidating assets would bring business operations to a standstill as the use of the asset is integral to the functionality of the enterprise.
Unlike a traditional mortgage, which often finances 70% to 80% of the property value, a sale-leaseback allows a company to get 100% of the value from the real estate.
Sale-Leasebacks can be constructed flexibly providing options to both seller and investor. Some examples would include offering a Joint Venture type involvement allowing the seller to share in a certain predetermined percentage capital growth gain in value, or structure buy-back options on certain pre-determined conditions. Investors can also provide themselves with certain down side protection.
Within this context one ought to consider the net-lease too, whereby a company finances a new location by finding third parties to buy the property and then leasing it from them. There is a surge in such transactions currently in Western Economies. It has been opinioned that this is partly because companies with weak credit ratings are finding it hard to get conventional financing and are increasingly turning to real estate as a source of cash.
However it has to be said that even solid companies with strong credit ratings are looking for ways to raise cash to retire debt and improve their financial ratios. In fact, many of the biggest names in business — including Microsoft, and Wal-Mart have used leaseback over the years.
Bri-Anne Powell, investment consultant for Pam Golding Commercial in Gauteng is reported as saying “There are investors in the marketplace who have an appetite to purchase sale and leaseback properties, preferably industrial in nature, in visible, strategic locations. In terms of industrial property the areas of the Durban South, East Rand, Midrand and Centurion are favoured, and in regard to very large industrial properties it is preferred that these would comprise a main warehouse or factory which would be located near OR Tambo International Airport.”
Sale-leasebacks ought not to be a prospect for an investor who isn’t going to cope with the potential struggles of owning commercial real estate or an investee who can’t afford to loose his asset. If a company that’s leasing a property goes bankrupt, the court may not uphold the lease. So the’ buyer beware’!
The recipe to being a lucrative investor in sale-leasebacks is not just appropriate decision-making but to make use of one’s asset to maximum effect. For the purchasing party to a sale-leaseback, they have acquired a property with potential for growth and a long term income flow from the lease. On the sale side of the transaction there is the liquidation of an unwanted or superfluous asset whilst retaining long term use of the same through a lease agreement.
Posted on June 10, 2014, in Commerce, Durban, Finance, Property, Webarticles and tagged American Tower Corporation, backleasing, buyer beware, Cell C, cellular network, conventional financing, Helios, Joint Venture, Pam Golding Commercial, sale-leaseback, traditional mortgage. Bookmark the permalink. Leave a comment.