Real Estate Sale Leaseback Financing: Structuring Deal Terms for - - PowerPoint PPT Presentation

Real Estate Sale Leaseback Financing: Structuring Deal Terms for Property Owners, PE Firms and Other Sponsors

Strategies for Maximizing Value, Optimizing Cost of Capital, and Minimizing Tax Liabilities and Risks

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Presenting a live 90-minute webinar with interactive Q&A

Katie Barthmaier, Executive Director, W. P . Carey Inc., New Y

• rk

Armand (Bud) Grunberger, Partner, Fisher Broyles LLP, Washington, D.C. Anthony Palazzo, Attorney at Law, Private Holding Company, Durham, N.C.

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Investing for the long runTM | 5

Real Estate Sale-Leaseback Financing

August 2014

Katie Barthmaier, Executive Director (212) 492-1125 kbarthmaier@wpcarey.com

Investing for the long runTM | 6

• Founded in 1973, W. P. Carey is a leading global real estate investment firm and

provider of net lease financing for corporations worldwide

• W. P. Carey specializes in sale-leaseback and build-to-suit transactions, as well

as the acquisition of existing net-leased properties, and currently owns and manages approximately $16 billion in total assets

• Transaction size ranges from $5 million to $500 million
• W. P. Carey is a publically traded real estate investment trust (REIT) listed on the

New York Stock Exchange under the symbol WPC

• 5 offices worldwide: New York, London, Dallas, Amsterdam & Shanghai

About W. P. Carey Inc.

Investing for the long runTM | 7

Presentation Overview

• Sale-Leaseback deal structures
• Overview of market
• Critical considerations for investors
• Critical considerations for property owners, PE firms and other sponsors
• Case studies

Investing for the long runTM | 8

Traditional Sale-Leaseback

• Alternative form of financing
• Company sells its real estate for cash and enters into long-term lease
• Long-term leases translate into steady cash flow

Owner raises capital and the investor creates an income producing investment asset

Investing for the long runTM | 9

Build-to-Suit

• Expanding existing facilities/constructing new facilities
• Acquiring additional facilities, technology and equipment to grow business

Investing for the long runTM | 10

• Investor search for yield in low interest rate environment
• Competition for quality long term income-generating investments
• Cap rate compression
• Shorter average lease term
• More deals in secondary cities and non-core locations

Current Market Trends

Investing for the long runTM | 11

Per Real Capital Analytics:

• Total volume of net lease sales across all property types reached nearly $44.8

billion in 2013

• Up about 24 percent compared to $36.2 billion in sales recorded in 2012

Composition of Market:

• Traditional sale-leaseback
• Build-to-suit
• Existing net lease investments

Current Market Trends

Investing for the long runTM | 12

Transaction Drivers – Sale-Leaseback Benefits

• M&A
• Build-to-suit financing for new construction
• Restructuring & turnaround transactions
• Acquiring facilities, technology and equipment to grow business
• Improving balance sheet

Realizes 100% of Asset Value Diverse Range of Uses for Proceeds Lease Flexibility to Assimilate Ownership

• In exchange for illiquid assets
• Tenant retains operational control
• Leases structured to meet tenant’s needs

Operating Lease Treatment

• Leaves the borrowing capacity of the company unaffected

Cost Efficient Funding Source

• Reduces need for higher cost mezzanine debt & equity
• Decreases EBITDA multiple
• Lowers required equity investment to improve ROE

Investing for the long runTM | 13

Critical Asset Characteristics for Investor

Creditworthiness

• f the tenant

Four key components

• f a

sale-leaseback transaction

Asset(s) critical to the tenant’s business Fundamental value

• f the underlying

real estate Transaction structure and pricing Investors strive to balance these four elements

Investing for the long runTM | 14

• Established source of capital
• Ability to execute and close on a timely basis
• Long term investment outlook
• Ability to evaluate tenant credit and the real estate
• Asset management capabilities/ongoing tenant relationships
• History and reputation

Critical Investor Characteristics for Seller/Tenant/Owner

Investing for the long runTM | 15

• Manufacturer of steel roll up sheet doors and storage facility components for self-

storage, commercial and industrial markets

• Portfolio company of private equity firm Saw Mill Capital

Case Study – Janus

Sale-leaseback transaction supports private equity investment in portfolio company

Investing for the long runTM | 16

• Properties leased back to Janus for 20 years
• Three critical facilities housing Janus’ manufacturing capacity
• Provide the company with manufacturing bases across the United States

Sale-leaseback financing enabled Janus to access the value tied up in these critical assets:

• Allowed the company to reinvest in its strategic initiatives
• Supported Saw Mill Capital’s investment in the company

Case Study – Janus

$17 million purchase of three facilities located in Georgia, Arizona and Texas from Janus

Investing for the long runTM | 17

• Leading North American provider of laundry detergent, fabric softeners and other

household products

• Portfolio company of Vestar Capital

Case Study – Sun Products

Build-to-Suit financing funds construction cost for PE portfolio company distribution center

Investing for the long runTM | 18

Upon completion, the 1.4 million square foot facility was leased to Sun Products on a long-term basis:

• Sun Products consolidated nine facilities in the area
• Effective savings of $2 million annually in operation costs
• No out of pocket cash costs
• Provided developer “one stop” financing for construction and development of the

building

Case Study – Sun Products

$41 million in build-to-suit financing for a to-be built distribution center in Bowling Green, Kentucky

Investing for the long runTM | 19

• Institutional owner, sponsor or developer seeks near term liquidity
• IRR objectives
• Re-investment objectives
• Restructuring an existing lease to achieve maximum current liquidity value

– Lease Term – Rent – Net Lease vs. Gross Lease – Other Incentives

Existing Net Leases

Investing for the long runTM | 20

• Headquarters for Avnet Technology Solutions
• One of two operating groups of Avnet, Inc.

Case Study – Avnet

Purchase of existing net leased asset from institutional owner

Investing for the long runTM | 21

• Located within the Arizona State University Research Park in Tempe
• Property leased to Avnet for a period of 10 years

Sale provided liquidity to institutional owner allowing seller to:

• Meet year end closing objectives
• Achieve IRR return targets
• Recycle capital into new investments

Case Study – Avnet

$23 million acquisition of 132,070 square foot critical property

TAX ASPECTS-SALE-LEASEBACK TRANSACTIONS

ARMAND (BUD) GRUNBERGER, ESQ PARTNER, FISHERBROYLES LLP WASHINGTON, DC

22 Tax Aspects - Sale-Leaseback Transactions

TYPICAL SALE-LEASEBACK

• TWO TRANSACTIONS:

(1) SALE BY SELLER TO BUYER; AND (2) CONCURRENT LEASEBACK FROM BUYER TO SELLER

• MINIMUM OF 2 PARTIES:

SELLER-LESSEE (“S-Lee”) and BUYER-LESSOR (“B-Lor”)

23 Tax Aspects - Sale-Leaseback Transactions

CORE TAX ISSUE: WILL FORM OF TRANSACTION BE RESPECTED?

• IS IT A SALE AND CONCURRENT LEASEBACK?
• IS IT, IN REALITY, A FINANCING

TRANSACTION?

• SINCE THE FORMER OWNER, IN A TYPICAL

SALE-LEASEBACK, CONTINUES TO OCCUPY THE PROPERTY AND PAYS, DIRECTLY OR INDIRECTLY, OPERATING COSTS OF THE PROPERTY, TRANSACTION IS SUBJECT TO MORE IRS SCRUTINY

24 Tax Aspects - Sale-Leaseback Transactions

CONSEQUENCES OF TAX RECHARACTERIZATION AS A FINANCING TRANSACTION

• IF TREATED AS A FINANCING TRANSACTION:

(1) TREATED AS LOAN FROM BUYER TO SELLER; (2) SUBSEQUENT SALE IF BUYER-LESSOR RETAINS OWNERSHIP (3) SELLER DEEMED TO RETAIN OWNERSHIP INITIALLY, AND CONSEQUENCES OF “PURPORTED SALE” (4) ONLY PORTION OF RENTAL PAYMENTS TREATED AS INTEREST ON IMPLIED LOAN ARE DEDUCTIBLE— REMAINING PORTION OF PAYMENTS TREATED AS REPAYMENT OF PRINCIPAL

25 Tax Aspects - Sale-Leaseback Transactions

CONSEQUENCES OF TAX RECHARACTERIZATION AS A FINANCING TRANSACTION (cont’d (2/3))

• (5) “SALES PROCEEDS”=PRINCIPAL AMOUNT OF

LOAN

• (6) “LEASE PAYMENTS” (EXCL. OP. COSTS)=LOAN

PAYMENTS

• (7) IMPLICIT INTEREST RATE DERIVED FROM

CASH FLOWS

• (8) “SELLER-LESSEE”=TREATED AS OWNER FOR

DEPRECIATION, PROPERTY TAXES, AND SIMILAR ITEMS

• (9) “BUYER-LESSOR”=RECOGNIZES INTEREST

INCOME ON “LEASE PAYMENTS”

26 Tax Aspects - Sale-Leaseback Transactions

CONSEQUENCES OF TAX RECHARACTERIZATION AS A FINANCING TRANSACTION (cont’d (3/3))

• TAX LAW IS MURKY, WHEREAS FINANCIAL

ACCOUNTING GUIDELINES ARE RELATIVELY CLEAR-CUT AND ARBITRARY

• TAXPAYERS SEEKING SALE-LEASEBACK

TREATMENT HAVE HAD FAR GREATER SUCCESS IN COURT

• TRANSACTIONAL PLANNING CONCERNS HOW

FAR OUTSIDE IRS “SAFE HARBORS” TAXPAYER STRAYS

27 Tax Aspects - Sale-Leaseback Transactions

FRANK LYON CO. v. U.S.

• LANDMARK SUPREME COURT CASE
• 435 U.S. 561 (1978), rev’g 536 F.2d 746 (8th Cir. 1976),

rev’g and rem’g 75-2 USTC ¶9545 (E.D. Ark. 1975)

• FACTS: SALE-LEASEBACK USED AS ALTERNATIVE TO

MORTGAGE FINANCING

• SELLER SOLD BUILDING TO BUYER FOR $7.64 M-B-Lor

INVESTED $500,000 AND HAD MTG FOR BALANCE (arranged by S-Lee)

• S-Lee LEASED BACK BLDG. FOR TERM OF 25 YRS.,

WITH EIGHT 5 YR. RENEWAL OPTIONS

• LEASEBACK WAS A NET LEASE, S-Lee LIABLE FOR

INSURANCE, TAXES, MAINTENANCE AND UTILITIES

28 Tax Aspects - Sale-Leaseback Transactions

FRANK LYON CO. v. U.S. (2/4)

• S-Lee HAD 4 OPTIONS TO REPURCHASE

PROPERTY FOR PRICE EQUAL TO UNPAID MORTGAGE OF B-Lor PLUS $500,000 (AFTER 11,15,20 and 25 YRS.)

• CONDEMNATION OR INSURANCE PROCEEDS-

APPLIED FIRST TO B-Lor’s MTG, THEN $500,000 TO B-Lor, REMAINDER (if any) TO S- Lee

29 Tax Aspects - Sale-Leaseback Transactions

FRANK LYON CO. v. U.S. (3/5)

• HELD: VALID-SALE-LEASEBACK
• COURT CITED NUMEROUS FACTORS:
• (1) MORE-THAN 2 PARTIES INVOLVED (S-Lee,B-Lor and THIRD-PARTY

MORTGAGEE)

• (2) B-Lor LIABLE ON MORTGAGE
• (3) B-Lor EXPOSED TO REAL AND SUBSTANTIAL FINANCIAL RISK
• (4) B-Lor’s FINANCIAL POSITION SUBSTANTIALLY AFFECTED BY PRESENCE

OF L-T DEBT AND USE OF $500,000 WORKING CAPITAL

• (5) NON-TAX BUSINESS PURPOSE-B-Lor COMPELLED TO USE STRUCTURE

BECAUSE OF REGULATORY RESTRAINTS

• (6) NON-FAMILY ARM’s LENGTH TRANSACTION (ALTHOUGH BUYER WAS

INSIDER)

• (7) GOVERNMENT WOULD LOSE LITTLE REVENUE, IF ANY

30 Tax Aspects - Sale-Leaseback Transactions

FRANK LYON CO. v. U.S. (4/5)

• Majority Opinion: “Where there is a genuine

multiple-party transaction with economic substance that is compelled or encouraged by business or economic realities, that is imbued with tax- independent considerations, and that is not shaped solely by tax-avoidance features that have meaningless labels attached, the Government should honor the allocation of rights and duties effectuated by the parties…so long as the lessor retains significant and genuine attributes of the traditional lessor status, the form of the transaction adopted by the parties governs for tax purposes. Id. At 435 U.S. 561, 584 (1978)

Tax Aspects - Sale-Leaseback Transactions 31

FRANK LYON CO. v. U.S. (5/5)

• Transaction and economics looked like a second mortgage on the

property for S-Lee

• However, the Supreme Court emphasized the fact that the B-Lor

had (i) real economic exposure in the event of a default or a decline in property values; (ii) the non-tax business purpose for the sale-leaseback because of regulatory restraints; and (iii) the involvement of an independent third-party lender.

• Tax murkiness lingered because the Court failed to rank the

relative importance of the factors discussed.

• But see, Sun Oil Co. v. Comr, 562 F.2d 1194 (3d Cir. 1977, rev’g 35

T.C.M. 173 (1976)-IRS successfully won a recharacterization as financing transaction

Tax Aspects - Sale-Leaseback Transactions 32

IRS COURT VICTORIES IN RECHARACTERIZING SALE-LEASEBACKS

• Sun Oil Co. v. Comr, 562 F.2d 1194 (3d Cir. 1977), cert.

denied 436 U.S. 944 (1978), rev’g 35 T.C.M. 173 (1976)-Rental terms precisely correlated to payments

• n underlying mtg. plus fixed return on B-Lor’s

investment.

• See also, Helvering v. F. & R. Lazarus & Co., 308 U.S.

252 (1939); Estate of Franklin v. Comr., 544 F.2d 1045 (9th Cir. 1976); Hilton v. Comr., 74 T.C. 305 (1980), aff'd per curiam, 671 F.2d 316 (9th Cir. 1982); Pacific Gamble Robinson v. Comr., 54 T.C.M. 915 (1987); and Falsetti v. Comr., 85 T.C. 332 (1985).

Tax Aspects - Sale-Leaseback Transactions 33

SIGNIFICANT FACTORS IN STRUCTURING A SALE-LEASEBACK (1/3)

• MUST ANALYZE ALL OF THE FACTS-NO ONE FACTOR IS

DETERMINATIVE

• 1. Intent of the parties.
• 2. Parties are acting in good faith and at arm’s length
• 3. Fairness of purchase and repurchase price.
• 4. Involvement of independent appraiser if necessary.
• 5. Lack of economic compulsion for S-Lee to exercise

the repurchase option-American Realty Trust v. U.S., 498 F.2d 1194 (4th Cir. 1974)

Tax Aspects - Sale-Leaseback Transactions 34

SIGNIFICANT FACTORS IN STRUCTURING A SALE-LEASEBACK (2/4)

• 6. Substance over form- Economic benefits and burdens
• f ownership remained with S-Lee, not B-Lor.
• 7. Use of net lease (combined with other factors).
• 8. Compensation through additional rent in event of

casualty.

• 9. Ability of S-Lee to benefit from appreciation of

property.

• 10. Option to repurchase, where price equals P.V. of

future rents.

• 11. Below-market rent.

Tax Aspects - Sale-Leaseback Transactions 35

SIGNIFICANT FACTORS IN STRUCTURING A SALE-LEASEBACK (3/4)

• 12. Lack of economic substance-Sale in fact a “sham.”

See, Andantech LLC v. Comr., T.C. Memo 2002-97 (no possibility for B-Lor profit).

• 13. Purchase price of property exceeds FMV.
• 14. Legal title must vest in B-Lor.
• 15. B-Lor entered into transaction solely for purpose
• f obtaining favorable tax consequences.
• 16. Absence of economic profit apart from tax

benefits-but profit in the form of interest-type return

• n invested capital should suffice (Frank Lyon v. U.S.)
• 17. Length of lease and profit expectation-30 years

too long (Supra, Hilton v. Com’r).

Tax Aspects - Sale-Leaseback Transactions 36

SIGNIFICANT FACTORS IN STRUCTURING A SALE-LEASEBACK (4/4)

• 18. Meaningful economic investment by B-Lor-

Abandonment test.

• 19. Favorable purchase or renewal options-Sowerby v.

Comr., 47 T.C.M. 897 (1984).

• 20. Disavowing the form of the transaction-Some courts

establish a “strong proof test” rather than “economic realities” and intent.

• 21. Absence of significant positive net cash flow during

lease term-See, Larsen v. Comr., 89 T.C. 1229 (1987).

• 22. Rental income stream matches debt service.
• 23. Bargain renewal or purchase options.

Tax Aspects - Sale-Leaseback Transactions 37

IRS PRONOUNCEMENTS

• Rev. Rul. 55-540, 1955-2 C.B. 39- Six “deadly” factors:
• 1. Lessee to acquire title upon payment of stated

amount of rentals.

• 2.Portions of periodic rent payments are made

specifically applicable to equity yo be acquired by S-Lee.

• 3. Inordinately large “up-front” payments for relatively

short use of property.

• 4. Agreed rental payments exceed current FRV
• 5. Nominal purchase option (not FMV)
• 6. Portion of periodic payments by S-Lee specifically

recognizable as equivalent of interest.

Tax Aspects - Sale-Leaseback Transactions 38

ADVANCE RULING GUIDANCE (1/2)

• Rev. Proc. 2001-28, 2001-1 C.B. 1156-Guidelines

for leveraged lease transactions-mechanical tests included.

• IRS Examination Tax Shelter Handbook-IRM

4236, Ch. 300 at 3(20).

• FSA 199927039-Strategies for attacking sale-

leasebacks.

• TAM 201027045-Two sale-leasebacks

distinguished-”ground owned” + “ground leased.”

Tax Aspects - Sale-Leaseback Transactions 39

ADVANCE RULING GUIDANCE (2/2)

• Other IRS rulings applying factors listed in

Grodt & McKay Realty v. Comr., 77 T.C. 1221 (1981) (true ownership for tax purposes-no sale-leaseback) and Torres v. Comr., 88 T.C. 702 (1987)-FSA 200346007; FSA 2000201022; FSA 200145002; FSA 200152002; FSA 200106019; See also, TAM 200346007; CCA 200338009.

Tax Aspects - Sale-Leaseback Transactions 40

ADVANCE RULING GUIDANCE- REFERENCE MATERIALS

• REVIEW OF REV. PROC. 2001-28,

2001-1 C.B. 1156

• REVIEW OF REPRESENTATIONS

REQUIRED FOR ADVANCE RULING ISSUANCE SET FORTH IN

• REV. PROC. 2001-29, 2001-1 C.B.

1160

Tax Aspects - Sale-Leaseback Transactions 41

AVOIDING IRS CHALLENGE IN STRUCTURING A SALE-LEASEBACK

• 1. Consider two entirely different sets of documents should

be drafted, one for the sale of the real estate and one for the lease agreement.

• 2. Recite the business purpose for the transaction and the

formalities of the agreement should be followed. Avoid loan language or structure.

• 3. The property should be sold at fair market value, the

amount of which is supported by an independent appraisal.

• 4. A substantial cash return on the leaseback should be

included, to avoid having the transaction viewed as being created solely for tax purposes.

Tax Aspects - Sale-Leaseback Transactions 42

AVOIDING IRS CHALLENGE IN STRUCTURING A SALE-LEASEBACK (2/5)

• 5. The transaction should not be between

related parties.

• 6. Multiple (more than two) parties are

recommended: the S-Lee, B-Lor, and, an institutional lender.

• 7. The sale-leaseback should be designed to

qualify as an operating lease under GAAP

• 8. The lease term should not exceed the

economic life of the property

• 9. The term of the leaseback should be less than

30 years (if possible).

Tax Aspects - Sale-Leaseback Transactions 43

AVOIDING IRS CHALLENGE IN STRUCTURING A SALE-LEASEBACK (3/5)

• 10. The B-Lor should make an equity investment in the

property.

• 11. Rent should be at fair market value and also

supported by independent appraisal. Level or increasing rental payments are desirable (within limitations set forth by IRC §467).

• 12. The lease should not be structured as a "pure net

lease."

• 13. Renewal options should provide for a fair market

rental value at the time the option is exercisable.

Tax Aspects - Sale-Leaseback Transactions 44

AVOIDING IRS CHALLENGE IN STRUCTURING A SALE-LEASEBACK (4/5)

• 14. There should be no repurchase options. If one is necessary, ideally it

should be based on the fair market value of the property at the exercise date.

• 15. The seller-lessee should not provide guarantees of the loans

financing the purchase of the property (although a pledge of the lease is common).

• 16. The B-Lor should not have a put on the property.
• 17. All condemnation and insurance payments in excess of liabilities on

the property should inure to he B-Lor.

• 18. The transaction should be structured so that the buyer-lessor can

meet the so-called ”imprudent abandonment test. “

Tax Aspects - Sale-Leaseback Transactions 45

TAX CONSEQUENCES- SALE-LEASEBACK TRANSACTION (1/5 )

A. SELLER-LESSEE (S-Lee) IN A SALE-LEASEBACK TRANSACTION

• 1. SALES TRANSACTION-IRC §1001(a)-Gain generally

recognized in year of sale

• a. Like-Kind Exchange-IRC §1031 nonrecognition of

gain

• b. Use of Property determines character of gain-IRC

§1231 treatment if used in trade or business (or transaction entered into for profit) and held for more than one year.

• c. Timing Considerations-Use of NOLs, Installment

Sale treatment, and Loss Recognition.

Tax Aspects - Sale-Leaseback Transactions 46

TAX CONSEQUENCES- SALE-LEASEBACK TRANSACTION (2/5)

• B. Tax Issues related to the Sale
• 1. IRC §465-In Sale-Leaseback transaction, seller

financing does not provide Buyer with at-risk basis.

• 2. Absence of third-party financing renders

transaction more susceptible to recharacterization

• 3. Installment Sale issues- (i) Review interest

charge and pledge rules of IRC §453A; (ii) Adequacy of stated interest and timing of recognition under IRC §§1271-1275.

Tax Aspects - Sale-Leaseback Transactions 47

TAX CONSEQUENCES- SALE-LEASEBACK TRANSACTION (3/5)

• C. Related Party Rules
• 1. If B-Lor is related to S-Lee under IRC §707(b) or

1239 and attribution rules, capital gain recharacterized as ordinary income.

• 2. Loss on sale of property to related party-

Not Deductible. IRC §267(a), 267(b) (constructive attribution rules)

• 3. Another IRS weapon-IRC §482 to prevent

evasion of taxes or to clearly reflect income. Has been used to allocate tax items and recast sales price to FMV. See, Aladdin Industries, Inc. et. Al. v. Comr., 41 T.C.M. 1515 (1981).

Tax Aspects - Sale-Leaseback Transactions 48

TAX CONSEQUENCES- SALE-LEASEBACK TRANSACTION (4/5)

• D. Lease Transaction-Taxed as stand-alone lease, but scrutinized

like related-party

• 1. Did parties understate sales price and gain in

exchange for lower lease payments?

• 2. Failure to set arm’s-length market rent-if trade-off was

reduction in purchase price, both sale and lease prices “grossed-up” to reflect market value of “free” rent. See, e.g., Steinway & Sons v Comr. , 40 T.C. 363 (1966) and Al Stores Realty Corp. v. Comr., 46 T.C. 363 (1966).

• 3. Issue of rent-free occupancy rights-Cases go both

ways

• 4. IRC §467-Issue of disqualified leaseback or long-term

agreement

• E. Transaction Costs- Allocate between sale and lease, affecting

gain and amortization.

Tax Aspects - Sale-Leaseback Transactions 49

TAX CONSEQUENCES- SALE-LEASEBACK TRANSACTION (5/5)

• F. BUYER-LESSOR
• 1. Allocation of cost of property between land

and building.

• 2. Consideration of cost segregation study
• 3. Lease transaction-Advance rental payments in

B-Lor’s income in tax year received.

• 4. Review IRC §467 for permissible stepped rents
• 5. Losses may be limited under at-risk and

passive loss rules.

Tax Aspects - Sale-Leaseback Transactions 50

ACCOUNTING FOR LEASE TRANSACTIONS-SUMMARY (1/2)

• 1. Capital Lease-Any one of 4 criteria met
• a. Transfer of ownership to Lee during term of

lease or at end

• b. Bargain purchase option
• c. Lease term, including renewal periods, equals

at least 75% of estimated useful economic life

• f leased property
• d. PV of minimum lease payments equals 90% of

fair value of leased property.

• 2. If not a capital lease, it is an operating lease.

Tax Aspects - Sale-Leaseback Transactions 51

ACCOUNTING FOR LEASE TRANSACTIONS-SUMMARY (2/2)

3.Classification of Capital Lease

• a. Sales-type lease
• b. Direct financing lease
• c. Leveraged lease
• 4. Operating Lease Consequences
• 5. Other Issues

Tax Aspects - Sale-Leaseback Transactions 52

NEW DEVELOPMENTS

ARMAND (BUD) GRUNBERGER, ESQ PARTNER, FISHERBROYLES LLP WASHINGTON, DC

• bgrunberger@fisherbroyles.com
• Phone: 410-353-5348

Tax Aspects - Sale-Leaseback Transactions 53

REAL ESTATE SALE LEASEBACK FINANCING: STRUCTURING DEAL TERMS FOR PROPERTY OWNERS, PE FIRMS & OTHER SPONSORS

Anthony Palazzo, Esq. anthonyp@eliglobal.com

Prudential Story Hurricane Sandy - Check the Documents: Insurance- See Opinion Letter

• 16. Fire and Other Casualty. In case of fire or other casualty, the Tenant shall give immediate

notice to the Landlord. If the premises shall be partially damaged by fire, the elements or other casualty, the Landlord shall repair the same as speedily as practicable, but the Tenant's obligation to pay the rent hereunder shall not cease. If, in the opinion of the Landlord, the premises be so extensively and substantially damaged as to render them untenantable, then the rent shall cease until such time as the premises shall be made tenantable by the Landlord. However, if, in the

• pinion of the Landlord, the premises is totally destroyed or so extensively and substantially

damaged as to require practically a rebuilding thereof, then the rent shall be paid up to the time

• f such destruction and then and from thenceforth this lease shall come to an end. In no event

however, shall the provisions of this clause become effective or be applicable, if the fire or other casualty and damage shall be the result of the carelessness, negligence or improper conduct of the Tenant or the Tenant's agents,' employees, guests, licensees, invitees, subtenants, assignees

• r successors. In such case, the Tenant's liability for the payment of the rent and the

performance of all the covenants, conditions and terms. hereof on the Tenant's part to be performed shall continue and the Tenant shall be liable to the Landlord for the damage and loss suffered by the Landlord. If the Tenant shall have been insured against any of the risks herein covered, then the proceeds of such insurance shall be paid over to the Landlord to the extent of the Landlord’s costs and expenses to make the repairs hereunder, and such insurance carriers shall have no recourse against the Landlord for reimbursement.

55

Insurance

• 17. -N/ A
• 18. Repair and Maintenance. Anything to the contrary notwithstanding, the Tenant shall at

Tenant's own cost and expense, maintain in good condition and make all repairs and replacement

• f all HVAC, heating, electrical, air conditioning, and plumbing, bathroom fixtures and equipment

servicing or located in the demised premises. Tenant shall maintain and provide Landlord proof

• f Tenant’s maintenance of a HVAC service contract with a reputable Heating & Air-conditioning

Company servicing the HVAC unit. Tenant is responsible for the upkeep, repair, maintenance and replacement of all interior walls, floor, ceilings, exterior/ interior doors, and windows regardless

• f cause or fault. Tenant shall keep the demised premises and all parts including windows

thereof in a clean and sanitary condition. Tenant shall neither encumber nor obstruct the sidewalk, entrance or exit, but shall keep and maintain the same in a clean condition, free from debris, trash, refuse, snow and ice. Tenant is responsible for the repair, replacement and maintenance of all lights, light bulbs, exit lights, etc. servicing the premises including but not limited to interior lights, exterior lights, lights in the front and rear soffit.

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SNDA

Estoppel Condition/SNDA Condition. S ubj ect t o S ect ion 5.3(iv), S eller providing t o Purchaser est oppel let t ers (“ Est oppels” ) from t he Maj or Tenant s in a mut ually agreed upon form, same t o be accept able t o Purchaser in it s sole and absolut e discret ion (t he “ Est oppel Condit ion” ) and, t o t he ext ent t he purchase of t he Propert y is being financed by mort gage financing, individually, an “Estoppel” and collectively, the “Estoppels”) from the Major Tenants (as defined in Section 1.9) in the form of the same attached hereto as Exhibit B and incorporated herein by reference (the “Estoppel Condition”) and subordinat ion, non- dist urbance and at t ornment agreement s (“ S NDA” ) accept able t o Purchaser’s mort gage lender in such lender’s sole and absolut e discret ion (t he “ S NDA Condit ion” ) from t he Maj or Tenant s (as defined in S ect ion 1.9) of t he Propert y individually, an “SNDA” and collectively, the “SNDAs”) from the Major Tenants (the “SNDA Condition”), same t o be on t he forms required by Purchaser’s int ended mort gagee, such forms t o be provided t o S eller not less t han t hirt y (30) days prior t o t he init ial dat e of Closing (or t he forms ot herwise required under t he applicable t enant Lease (defined below)). Qualificat ions such as, “ t o t he best of t enant ’s knowledge” or language similar t heret o in t he Est oppels and/or the S NDAs shall be accept able. In no event shall t hean S NDA increase any of t he t enant’s obligat ions or decrease any of t heir right s under t heir respect ive leases without the consent of the respective tenants. The Est oppels and subordinat ion, non-dist urbance and at t ornment agreements the SNDAs shall be dat ed no earlier t han t hirt y (30) days prior t o Closing or t he Effective Date or such later dat e as is ot herwise reasonably designat ed by Purchaser’s int ended mort gagee, t o t he ext ent t here is t o be a mort gagee. In connection with the Estoppel Condition, Purchaser shall have the right, in its sole discretion, to reject any Estoppel obtained by Seller which alleges any material default under the applicable Lease (defined below), and, in the exercise of its reasonable discretion, to reject any Estoppel obtained by Seller which alleges any other default by Seller under the applicable Lease, such rights to be exercised if at all within five days after receipt by Purchaser of any such Estoppel.

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Estoppel

S eller shall use commercially reasonable effort s t o sat isfy t he Est oppel Condit ion/ S NDA Condit ion within t hirt y (30) days aft er Purchaser has provided S eller wit h t he Est oppels and, t o t he ext ent mort gage financing is being used in connect ion wit h Purchaser’s acquisit ion of t he Propert y, t he S NDA form required by Purchaser’s mort gagee on or before the conclusion of the Inspection Period. Purchaser shall prepare t he est oppel cert ificat es Estoppels and t he S

• NDAs. S

eller shall deliver t hem t o t he t enant s and follow up wit h good fait h effort s t o obt ain execut ed copies back from t he t enant s. Not wit hst anding t he foregoing, t o t he ext ent S eller shall be unable t o sat isfy t he Est oppel Condit ion/ S NDA Condit ion, Purchaser shall have t he right but not t he

• bligat ion t o seek t o sat isfy t he Est oppel Condit ion/ S

NDA Condit ion for and on behalf of S eller and S eller shall employ commercially reasonable effort s t o assist and cooperat e wit h Purchaser in connect ion t herewit h at no cost t o S

• eller. In t he event t hat Purchaser so chooses but is unable t o sat isfy t he Est oppel Condit ion/ S

NDA Condit ion wit hin t he t ime period afforded t o S eller, t hen in t he event t hat failure t o sat isfy same relat es t o a failure t o obt ain est oppel cert ificat es one or more Estoppels, Purchaser shall have t he right t o waive sat isfact ion of t he same, and, at Closing, t o require a S eller’s Est oppel in accordance wit h S ect ion 5.3(iv)

• below. In t he event Purchaser so chooses and is unable t o sat isfy t he Est oppel Condit ion/ S

NDA Condit ion, Purchaser shall have t he right t o t erminat e t his Agreement no lat er t han such t hirt y-fift h (35t h) day on or prior to the conclusion of the Inspection Period, upon not ice t o S eller, it being underst ood t hat t he failure of Purchaser t o not ify S eller of it s sat isfact ion or waiver wit h t he Est oppel Condit ion/ S NDA Condit ion on or before such 35t h day prior to conclusion of the Inspection Period shall be deemed t o mean t hat Purchaser has t erminat ed t his Agreement . If Purchaser t erminat es t he Agreement or is deemed t o have t erminat ed t his Agreement pursuant t o t his paragraph, t hen (i) t he Deposit shall be ret urned t o Purchaser, and (ii) neit her part y shall have any furt her liability or obligat ion hereunder, except t o t he ext ent such obligat ions expressly survive such t ermination.

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Delivery – See Contract- Purchaser Side

Purchaser’s Deliveries. At the Closing, Purchaser shall cause to be delivered to S eller, via federal wire transfer of funds the Purchase Price, as adj usted by the adj ustments set forth below. Purchaser shall assume by execution of the Assignment and Assumption of Leases and Contracts (in the form annexed hereto as Exhibit IJ) all of the landlord’s obligations under the Contracts and Leases, relating to periods subsequent to Closing including the obligation to refund security deposits of tenants

• f the Property but only as to those security deposits that have been retained or collected, together

with interest thereon, for which Purchaser receives credit at the Closing against the Purchase Price, but excluding any landlord obligations set forth in any oral or side agreements between any tenant and S eller

• r any prior owner of the Property unless the same were disclosed in writing to Purchaser at the time of

delivery of copies of the Leases to Purchaser. Furthermore, S eller shall indemnify, defend and hold Purchaser harmless of and from any loss, cost, liability or expense incurred by Purchaser on account of any such oral or side agreements. Purchaser shall not assume any obligations under the Leases for claims

• r suits of tenants asserted arising from the conduct acts or omissions of S

eller or from events occurring prior to the Closing and S eller shall indemnify, defend and hold Purchaser harmless from all loss, cost, liability and expense associated therewith with the acts or omissions of Seller in connection with such Leases arising prior to Closing (but not with respect to any other events occurring in connection with such Leases prior to Closing, i.e., those occurring during any other prior owner’s ownership of the Property). Purchaser shall have no liability with respect to any breach by S eller of S eller’s statutory

• bligations regarding security deposits of tenants of the Property and S

eller shall indemnify, defend and hold Purchaser harmless from all loss, cost, liability and expense associated therewith. 59

Condemnation

CONDEMNATION If notice of any action, suit or proceeding shall be given prior to Closing or appear

• n the title report or appear in Township Clerks office, for the purpose of condemning any

part of the Property, and as a result thereof any of the Maj or Tenants of the Property have the right to terminate their Leases, and/ or any action, suit or proceeding shall be given prior to Closing for the purpose of condemning any portion of the parking areas of the Property such that the remaining area will not satisfy the minimum parking requirements under applicable zoning regulations, and/ or in the event that any of the vehicular access points into the Property shall be permanently impeded in any material way either through the condemnation (or the tendering of a deed in lieu thereof) of any such access points or through the closure or material reduction in the utility of any of the roadways adj oining the Property or in proximity to the Property (e.g., the reduction of the number of lanes within a roadway servicing the Property or the actual closure of any such roadway), then Purchaser may terminate this Agreement within fifteen (15) days after receiving notice of such casualty upon notice to S eller, in which event (i) this Agreement shall terminate and be of no further force or effect, (ii) the Deposit shall be returned to Purchaser, and (iii) neither party shall have any further liability or obligation hereunder except as otherwise expressly set forth herein; but if Purchaser does not elect to terminate this Agreement, then in the event of Closing, the proceeds of such condemnation shall be assigned and shall belong to Purchaser.

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Environmental Matters

ENVIRONMENTAL MATTERS In the event that Purchaser closes title, Purchaser shall release S eller and its members, partners, agents, representatives and employees from any and all claims, losses, damages or liabilities of any nature arising from, or related to, “ Hazardous S ubstances” , as that term is hereafter defined, which are on, at, under or emanating from the Property. Purchaser, by paying the consideration for a deed to the Property at Closing, shall be deemed to release S eller and its members, partners, employees, agents and predecessors-in-title (collectively, the “ Released Parties” ) from, and to waive as against the Released Parties, all claims of liability for or attributable to any environmental condition of the Property, including without limitation any claim or lawsuit under any local, state or federal law, rule, ordinance

• r regulation relating to environmental contamination or other environmental matters.

Purchaser shall defend (but shall not indemnify or hold harmless) Seller to the extent Seller shall be named as a party defendant along with Purchaser in any action, suit or proceeding related to Hazardous Substances present on, at, under or emanating from the Property, with the express proviso that, Purchaser shall be entitled to recover from Seller any losses, costs or damages Purchaser may suffer on account of the acts or omissions of Seller.

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Environmental Matters Continued

ENVIRONMENTAL MATTERS - cont . The provisions of this S ection 14 shall survive Closing under this Agreement, and shall be incorporated in the deed to be delivered to Purchaser as a covenant running with the Land which shall be binding on all subsequent owners and operators of the Property. Nothing contained in this Section 14 shall, however, be construed to exculpate or release Seller or any of Seller’s predecessors-in-title from liability with respect to Seller’s own acts or

• missions or the acts or omissions of its predecessors-in-title under any local, state or

federal law, rule, ordinance, regulation or common law relating to environmental contamination or other environmental matters and the Deed shall so state. For purposes hereof, “ Hazardous S ubstances” shall mean any material, whether solid, liquid or gaseous, that includes all hazardous substances, hazardous wastes, hazardous materials, toxic substances, pollutants, and contaminants (including without limitation, asbestos), as defined in any federal, state or local laws or regulations relating to pollution or protection of human health or which may cause liability under common law

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