Sale-leaseback Solutions

What is a Sale-leaseback Transaction?

In a sale-leaseback transaction, an owner/ user elects to monetize its corporate real estate facility and structure a new, long-term lease on the property to an outside investor. In exchange, the company, through the sale of the facility, receives capital to grow and revitalize its business. The transaction has many benefits to the company, now tenant, as detailed below.

• 100 Percent Financing

Sale-leaseback proceeds are equal to 100 percent of the property value, in context to a loan, which only funds 65 percent to 75 percent of value.

• Improved Balance Sheet

By selling the real estate, the company is converting a long-term nonliquid asset into working capital. In addition, a mortgage appears on the balance sheet as a liability, while an operating lease does not.

• Off-Balance Sheet Transaction

No obligations are shown on the balance sheet, as sale-leaseback transactions receive operating lease treatment.

• Improved Income Statement

The real estate sale can reduce the negative impact of depreciation and interest on income statements.

• Access to Capital

The sale-leaseback capital received from the transaction can be deployed in core operations that yield higher returns then appreciation of real estate.

• Debt Reduction

The proceeds can also be used to pay down exiting debt and eliminate future refinancing risk.

• Better Access to Long-Term Capital Markets

With an improved balance sheet and income statement, a company can improve its credit status and have better access to variety of capital sources.

• Tax Benefits

By leasing its facility, a company can write off its entire rent payment, rather then only the interest portion of the mortgage payment.

• Maintain Control

The lease agreement is structured so that the tenant maintains full operating control over the space it occupies because it is designed to mirror ownership.

A Case Study of Sale-leasebacks

Firm XYZ owned its property for 15 years. The company acquired the property for $20 million with a senior mortgage that has amortized down to an approximate $10 million debt balance. The market value of the property is $30 million. By completing a sale-leaseback, the owner received 30 million in proceeds, which is used to reinvest in the company and pay down the $10 million debt balance. This removed the liability from its balance sheet. Firm XYZ signed a long-term lease that gave it flexibility and control over the use of its space and presented a stable real estate operating cost. The bottom-line benefit of a sale-leaseback transaction is that it allows a firm to convert the equity value of its real estate into cash, without disrupting its operation. Sale-leaseback transactions make sense from a capital-reinvestment, tax, balance sheet and cost-of-capital perspective.

Sale-leasebacks & NNN Dispositions: John J. Godwin’s Track Record

John J. Godwin is no stranger to sale-leaseback transactions and has been part of a number of them in recent years. This is a segment of the real estate market he knows well and has done deals all across the United States. See below for a list of his most notable recent deals and dispositions.

City Square Feet Quarter Closed

Raleigh, NC 62,000 sq. ft Q4 2018

Novi, MI 93,194 sq. ft Q4 2018

West Monroe, LA 107,000 sq. ft Q1 2018

North Liberty, IA 123,400 sq. ft Q1 2019

Victor, IA 153,120 sq. ft Q1 2019

Warren, MI 86,422 sq. ft Q4 2018

Plymouth, MI 42,300 sq. ft Q3 2019

Why Choose Marcus & Millichap to facilitate your sale-leaseback?

Marcus & Millichap is the leader in the acquisition and disposition of investment real estate properties throughout the U.S. Our Detroit-based team specializes in sale-leaseback transactions. Sale-leaseback transactions can offer several benefits to your company.

• 100 percent financing

• Improved Balance Sheet

• Off-Balance Sheet Transaction

• Improved Income Statement

As background, in 2018, we have closed a total of 9,472 transactions with over $46.3 billion in sales volume. In Detroit alone, we exceeded $1.8 billion in annual sales last year and are 35% above that number year to date. We find ourselves in a unique and ripe economic environment that is ideally suited for maximum valuations. We strongly feel that time is of the essence to take advantage of this disposition window.

6 Key Benefits for Business Owners

1. You Can Set Your Own Lease Terms

In the case of sale-leasebacks the seller is also the lessee, so this gives the seller the upper hand to structure the lease in a way that is best for them. The seller, now the tenant, has the benefit of negotiating extension options after the lease expires which can include terms for early lease termination if the tenant would like more flexibility.

2. Retain Control of Real Estate

Typically, sale-leaseback agreements are structured as triple-net leases, giving the responsibility for the taxes, insurance and common area maintenance to the tenant. A long-term, ‘hands-off’ lease from the investor provides the tenant similar control over the property as was the case when the tenant still owned the property. The tenant can work with the special purpose investor and include options that will provide for future expansion and sublease of property.

3. Tax Savings

Typically, lessees that are in a lease can write off the total lease payment as a tax expense. Because you are still the property owner, the interest and depreciation were the only tax deductions available.

4. Greater Value to the Real Estate

One of the best advantages to a sale-leaseback is the ability to structure the financing up to 100% of the appraised value of the property’s building and land.

5. No Financial Covenants

Because REIT has rules that prevent active management of real estate assets, a sale-leaseback generally allows for a few covenants. The benefit of fewer convents is that the company has greater control over its own business and operations which reduces risk of operating environments becoming stressful or difficult.

6. Attractive Implied Financing Rates

Sale-leaseback agreements has an implicit financing rate or cap rate embedded in its future rent payments. Although these rates are similar to what you would find in a traditional mortgage, a sale-leaseback provides you with cash up to 100% of the appraised value while a typical mortgage only offers 65% to 75%.

*Source: Stout https://www.stout.com/en/insights/article/sj17-sale-leaseback-transactions

*Source: Marcus & Millichap https://mmreis.sharepoint.com/Pages/Default.aspx

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What is a 1031 Exchange?

What is a 1031 Exchange?

A 1031 exchange is defined by the Internal Revenue Code (IRC) section 1031. A 1031 Tax Deferred Exchange offers taxpayers one of the last great opportunities to build wealth by “trading up” to a larger or higher-quality property while deferring capital gains taxes. By completing a 1031 Exchange, the Taxpayer (“Exchanger”) can dispose of investment or business-use assets, acquire replacement property and defer the tax that would ordinarily be due upon the sale. With help from a tax professional or attorney and a licensed broker from Marcus & Millichap to lead you down the right path, this can be a great tool to access your current equity.

Since 1921, section 1031 has permitted a taxpayer to exchange business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets, giving you the ability to defer the taxes that would otherwise have been due from the sale.

A 1031 Exchange allows investors to defer federal capital gains tax, state ordinary income tax, net investment income tax, and depreciation recapture on the sale of Investment property if certain criteria are met including:

• Buy replacement property for equal or greater than sold for and reinvest all proceeds

• Identify replacement property within 45 days of close of sale

• Purchase replacement property within 180 days of close of sale

• Must Sell and Buy property that is considered “like-kind” to each other

• Process must be handled by a Qualified Intermediary (QI)

While 1031 exchanges have gained increased popularity, each investor should take the time to evaluate their own situation and if this is the right move for them. The first step in this process is to have a qualified Marcus & Millichap agent evaluate your property and determine its market value. Then this information should be taken to a tax advisor to get a well-rounded scope of your particular situation. Some circumstances may dictate paying cash or taking a line of credit for a new property purchase depending on interest rates. In other instances, the 1031 exchange may be the way to go. The bottom line is that you need to talk to licensed professional and know your options.

Who can use 1031 Exchanges?

All businesses, manufacturers, real estate investors, companies in the construction, trucking, rail, marine and equipment leasing industries, farmers, ranchers, individuals and beyond can take advantage of 1031 exchanges. The 1031 Like-Kind Exchanges are one of the few incentives available to and used by taxpayers of all sizes. A recent industry survey showed that 60% of exchanges involve properties worth less than $1 million, and more than a third are worth less than $500,000. Qualified Intermediaries (QI), such as a Marcus & Millichap broker can facilitate non-simultaneous tax-deferred exchanges of investment and business use properties for taxpayers of all sizes, from individuals of modest means to high net worth taxpayers and from small businesses to large entities. Marcus & Millichap is the largest real estate firm that is focused solely on investment brokerage and are one of the industry’s leaders in 1031 exchanges. We have cultivated long term relationships with owners and investors of every major property type which will allow us to match your property and exchange buyers with speed and efficiency.

Knowing the Basics

While there are three basic types of exchanges- simultaneous, reverse and deferred- 95 percent are deferred. When selling an investment property, the code allows a seller 45 days from the close of escrow of the relinquished property (the “down leg”) to identify up to three replacement properties (the “up leg”), and an additional 135 days to close escrow on at least one of the identified properties. Alternatively, more properties can be designated if certain valuation tests are met. The seller must contract with a neutral third party, know as a qualified intermediary or accommodator, to hold the funds form the sale of the relinquished property and to purchase the replacement property for the seller’s benefit. Completing this process allows sellers of real property held for investment purposes to delay or defer the payment of capital gains and recapture the depreciation tax benefit. Deviating from the process described above may result in tax consequences or costly penalties.

Will the tax ever go away?

With 1031 Exchanges, taxes are deferred but not eliminated. These legitimate transactions utilize an important tax planning tool which is why it is crucial to consult both a licensed leader in the field of 1031 exchanges such as a Marcus & Millichap broker and a qualified tax professional. The payment of tax occurs:

1. upon sale of the replacement asset;

2. incrementally, through increased income tax due to foregone depreciation; or

3. by inclusion in a decedent’s taxable estate, at which time the value of the replacement asset could be subject to estate tax at a rate more than double the capital gains tax rate.

Reasons to Exchange

There are many reasons to exchange, such as:

• Defer Taxes: Federal, State & Depreciation Recapture

• Diversify or Consolidate a Real Estate Portfolio

• Increase Cash Flow

• Switch Property Types (Land, Industrial, Multi-Family, Office, Retail, Residential, Easements)

• Get into Other Real Estate Markets (Exchange anywhere within the U.S. & Territories)

• Build & Preserve Wealth

• Set up Heirs for the Future (Estate Planning: Stepped Up Basis)

• Increase Purchasing Power

Why Your 1031 Intermediary Choice Matters

If you are considering a 1031 tax deferred exchange to defer taxes when you sell your investment property, a “1031 Qualified Intermediary” (QI) is generally required. This usually means turning to a CPA, real estate agent, attorney or broker. A broker is a common choice to play the role of the QI, but be sure to vet out a reputable investment brokerage like Marcus and Millichap. This should be done prior to the transfer of the old investment property to prepare the necessary documentation, securely hold your exchange funds and acquire your new investment property.

However, since almost anyone can act as a 1031 Qualified Intermediary, here are some important factors to consider:

• 1031 Intermediaries are not regulated by the federal government and most states: This means that there are no uniform regulations or laws concerning how your funds are deposited, invested or secured by QIs. Many years ago, some investors lost their exchange funds when they were either stolen or poorly invested by unscrupulous QIs. In many instances these losses could have been avoided by conducting basic due diligence prior to selecting the QI.

• Safety and Security for the transfer of your funds: With cybercrime and fraud on the rise, bank wire transfers, particularly regarding real estate transactions, have been increasingly targeted and are amongst the most costly types of cybercrime today. Selecting a QI that has a secure computer network and updates its safety precautions for holding and transferring funds would be a wise choice.

• Financial Assurances for your funds: Since 1031 Intermediaries are not regulated by the federal government or by most states, they are not uniformly required to provide insurance or other protections for your exchange funds. Therefore, if your funds are lost or stolen by a QI that doesn’t provide adequate protections, the loss is borne by you.

• Expertise and Strength: Similar to the lack of uniform regulation, QIs are not licensed by the federal government or by most states. This means that just about anyone can act as a QI without any training or education regarding 1031 tax deferred transactions.

• Reputation: Although QIs are not regulated by the federal government, there is an industry trade association, Federation of Exchange Accommodators (FEA). Many reputable and stable QIs are members of this organization.

*Source: ipx1031.com

*Source: mmreis.sharepoint.com