Structuring Real Estate Sale-Leasebacks: An Alternative to Mortgage - - PowerPoint PPT Presentation

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

Structuring Real Estate Sale-Leasebacks: An Alternative to Mortgage Financing for Owner-Operators and Investors

Strategies for Improving Balance Sheet, Maintaining Control of RE Assets, Recovering Capital Costs, and Reducing Tax Liability

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, AUGUST 3, 2017

Brian E. Davis, Partner , Mayer Brown, Chicago Stephen E. Friedberg, Member , Mintz Levin Cohn Ferris Glovsky and Popeo, New York Andrew H. Raines, Partner , Raines Feldman, Los Angeles

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Structuring Real Estate Sale-Leasebacks: An Alternative to Mortgage Financing for Owner-Operators and Investors

Thursday, August 3, 2017 1:00 PM – 2:30 PM

Brian E. Davis Mayer Brown Chicago, IL

bdavis@mayerbrown.com

Stephen E. Friedberg Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. New York, NY

sefriedberg@mintz.com

Andrew H. Raines Raines Feldman Los Angeles, CA

araines@raineslaw.com

6

I.

Advantages

II.

Potential Concerns

III.

Description of the Transaction

• IV. Post-Closing Matters

V.

Sale Leaseback of Ground Lease Properties- Additional Issues

• VI. Questions and Answers
• VII. Rating Agency Requirements (Appendix)

7

1.

Historically last-ditch effort financing option for tenant companies.

2.

Public or private investment grade company (BBB+, Baa2, NAIC2 or better).

3.

Single site or multi-site sale leaseback.

4.

Single site existing tenancy conversion to credit tenant lease (requires the lease to comply with rating agency standards—See Appendix).

8

9

1.

Recoupment of cash from real estate for

• perations or expansion.

2.

Spread between traditional lease rental rates and senior secured debt rates.

3.

Lowest treasury rates in two decades.

4.

Economies of scale (e.g., one lease negotiation for multiple sites with one landlord).

5.

Very high loan/value ratio vs. asset based financing.

6.

Lower need for Landlord Concessions (TI's, rent- free, leasing commissions), as Tenant is in-place.

10

1.

Real estate not treated as an asset on Lessee’s books.

• a. Avoids depreciation impact on P&L.
• b. Improve performance ratios (e.g., return on assets).

2.

Leasehold obligation not treated as indebtedness

• n balance sheet (i.e., treated as operating, not

capital, lease).

3.

True Lease for Tax Purposes.

4.

Ability to Optimize Lease payment stream (§467 IRC).

5.

Accounting treatment- FASB Interpretation No. 46.

11

1.

For Public companies with a fiscal year after December 15, 2018 (starting calendar year 2019) and for other companies with a fiscal year after December 15, 2019 (staring calendar year 2020).

2.

Determination of capital versus operating lease.

• a. There are five criteria that have to be analyzed.
• b. Assuming the sale doesn’t permit the lessee to

repurchase the property at the end of the term or have a less than fair market purchase option (among other criteria), the lease will be classified as an operating lease.

12

3.

Unless a capital lease, seller-lessee will defer immediate gain and will report it

• ver the initial term.

4.

Seller-lessee will report the lease as an ROU (right of use) asset and indebtedness

• n its balance sheet (unlike current

treatment for tax purposes).

5.

This may affect debt covenants in financings.

13

6.

For many public or private investment companies this will lead to an analysis of

• wnership versus sale/leaseback for the

impact on balance sheet, financial covenants and stock price.

7.

Sale/leasebacks will still retain many of its current benefits (e.g. financing of the entire cost of acquisition and development at senior secured debt rates).

14

1.

Tenant Controls Facility -- Landlord generally passive.

• a. Sale leaseback – often a NNN lease.
• b. Control - generally greater control than

under existing conventional lease. Prior

• wnership of property by Tenant limits

Landlord repair and replacement obligations. As-is language may be added to Lease.

2.

Assignment/subletting permitted. Tenant generally remains obligated.

15

3.

Any lawful use permitted (subject to zoning and

• ther laws and covenants, restrictions and

exclusives, if any, for multitenant developments), with certain restrictions for hazmat and undesirable uses.

4.

Depending upon Lease term, landlord may be able to do a value-add deal for the Property.

5.

Property structural and non-structural alterations and expansions (including financing) – similar to 1 above.

6.

Right to “go dark” (unless retail or mixed use).

7.

Long-term control via favorable renewal options.

16

 Fee owned and ground leased properties

eligible (See VI below--although one accounting firm has questioned whether ground leased properties qualify).

17

• A. Bond-type lease – may limit rental upside.

B.

Failure to complete unfinished property -- rejectable offer (or delay of closing until construction completed). Consider holdback in PSA to handle.

• C. Casualty/condemnation issues.
• D. Potential upside to the purchaser after

extension options (reversionary interest).

18

19

1.

The Company--Seller and Lessee.

2.

The Buyer and Lessor.

3.

Factors to consider regarding new lease or existing lease.

4.

The Debt Certificate Purchasers.

• a. Private Placement.
• b. 144A Offering to QIB’s (Qualified Institutional

Investors).

5.

The Trustee.

6.

The Investment Banker.

7.

The Rating Agencies.

20

• 1. The Purchase Contract
• 2. The Lease
• 3. The Loan Documents
• 4. Other Documents

21

1.

Real Estate/Environmental Due Diligence.

• a. Gathering/organizing title, survey, environmental

and other information in required format.

• b. Potential assumption of construction agreements for

development deals.

• c. Identification and addressing of issues raised.

2.

Identification of, and negotiation with, financing sources.

3.

Document drafting and negotiation.

4.

Importance of estoppels and SNDAs.

5.

Closing.

22

23

• 1. Post-closing construction (if

development incomplete at closing).

• 2. Buyer should seek longest warranty

period possible.

• 3. Lease administration.
• 4. Approvals of land use changes.
• 5. Sale of excess land not subdivided by

Closing (should be accomplished pre- closing, if possible).

24

1.

Property administration.

2.

Ongoing repair, maintenance, tax, and insurance

• bligations.

3.

Subsequent Re-sale or Re-leasing.

25

• A. Financeability of ground leases –

requirements (Rating Agency Requirements).

• B. Impact on Pricing.
• C. SNDA, Recognition Agreements,

Other Lender Protections (Special Considerations).

26

 Questions?

27

A.

Lease Recording. The ground lease or a memorandum thereof must be of record.

B.

• Financeability. The ground lease must permit tenant’s

leasehold interest to be mortgaged by the tenant.

C.

Term of Lease. The term of the Ground Lease must be sufficiently in excess of the term of the leasehold mortgage facility. (S&P – 20 years; Duff & Phelps – 10 years; Fitch – 10 years; Moody’s – 30 years). This is to preserve the value of the collateral during the full term of the loan and takes into account the possibility

• f later term defaults and the need to refinance the

leasehold mortgage.

28

D.

Ground Lease Assignable. The ground lease must permit assignments of the tenant’s interest without consent of the

• landlord. Among other things, a sale at mortgage

foreclosure would involve an assignment of the lease; such assignment should not require landlord’s consent.

E.

• Estoppel. A landlord’s estoppel letter should confirm that

as of the closing that the ground lease is in full force and effect, has not been modified and that there are no defaults under the lease.

F.

Notice and Opportunity to Cure. The ground lease should provide that the leasehold mortgagee is to receive notice of and an opportunity to cure defaults under the lease. This affords the leasehold mortgagee the opportunity to cure defaults and keep its collateral in place.

29

G.

New Lease. The ground lease must provide the leasehold mortgagee with the right to a new lease in the event the mortgaged lease is terminated, including by virtue of a rejection in a bankruptcy case.

H.

Insurance/Condemnation Proceeds. The lease must call for proceeds to be applied to property restoration or to pay down the leasehold mortgage indebtedness.

I.

• Liens. The ground lease must be free of superior

liens and encumbrances.