I have been approached by the representative of a local buying group and asked post their Alberta business owners asking if they would consider selling their commercial or industrial property and then enter into a lease-back arrangement with the buyers.
The Short Version . . .
- Reduce debt and improve working capital
- Cash in on dilutive assets (move a fixed asset off the balance sheet and replace it with cash)
- A strengthened financial picture and enhanced flexibility
- Renegotiate credit facilities.
- Lower the company’s weighted average cost of capital.
- Make acquisitions, pay down debt, expand operations or modernize equipment.
- No disruption to employees, suppliers or customers
- Capital can be freed up for the owner’s retirement
- Tax advantages if the business has ABILs, capital losses or LCGE for the owner.
- Tax-free rollover potential
Lease Back your Property for Cash
I have been approached by investors looking to purchase Alberta real estate. I am not a realtor and cannot guide you in these matters.
But I can pass you on to a realty professional who can. He will pay me a finder’s fee should a deal finalize.
A sale-leaseback occurs when the owner of the business sells their property and enters in to a lease with the buyer.
Ownership in the operating business will not change; the original owner sells the property and the business signs a lease agreement with the investor for the same property.
The proceeds of the property sale are then available for reinvestment in the business or as partial proceeds in an exit strategy.
1) The real estate is well located for its purpose and is functional and well maintained, so as to be marketable to prospective future tenants or purchasers.
2) The financial strength and track record of an operating business will be healthy enough after the sale leaseback to provide comfort to both the investor and its lender.
Unlock the Value of Your Real Estate
Focus on your Core Business
In the current Western Canadian economy, business owners are looking to seize every advantage to get ahead of the competition and maintain liquidity and flexibility. Real estate is not core to an operating business and is likely to be dilutive to return on capital employed.
Selling a company’s owned real estate (likely carried below market) can unlock trapped capital. There is no disruption to the business and it can redirect the proceeds to buy competitors, expand operations, pay down debt or modernize equipment to achieve greater efficiencies.
Develop your Exit Strategy
A growing number of business owners are reaching retirement age.
The sale-leaseback strategy is also used as a viable exit strategy for the owner of a business to help access some of the equity in the business as a means of retirement. In this approach, the owner can monetize some or all of the value of the real estate for personal use but still maintain ownership of the operating business.
This is easier for an investor if a solid succession plan and strong financial covenant is in place.
This buyer offers further flexibility. By selling its real estate to a company who is in the business of achieving greater returns from real estate, a business owner can also choose to take some of the proceeds in the form of cash and the rest in shares of the buyer– potentially improving overall returns.
Please consult with your tax professional
The sale of real estate will have tax implications that need to be considered:
Loss Carry Forwards. Businesses sometimes have losses from previous years, which is valuable when such losses can be offset against capital gains incurred from selling real estate.
Capital Losses. Capital gains from the sale of real estate is useful in monetizing capital losses.
Lifetime Capital Gains Exemption. Similar to loss carry forwards, this exemption is of no monetary value until utilized. If the owned real estate has been actively used in the business, an owner may be able to use his $824,177 (2016) LCGE exemption to save income taxes otherwise payable.
Partnership Opportunities. Tax-free rollovers can enable an owner to defer or postpone the taxes owing on disposition of assets.
Best Practice for Buyer Brokerage
- The first step will be a call to the broker to get the buyer’s cell number.
- The seller using his own cell or any other number not associated with him to protect his identity will call the buyer to feel him out without revealing information that might identify the business.
- Talks would continue only if this initial conversation ended with mutual interest declared by both sides.
Anticipated following steps:
1. The seller will black out his firm’s name then fax / scan the last accountant prepared income statement and contact information to me. I will figure out your normalized cash flow (or you can ask your banker or accountant to do this so I’ll have is their numbers.) That will let me figure out a range inside in which a sale could happen. The seller will take my numbers to their accountant and lawyer to ensure this range matches what the seller’s professionals have seen pass over their desks.
2. Phone discussion with the broker
3. Meeting with the buyer and tour of premises
4. Discussions that may lead to a deal