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RV manufacturers and dealerships must remain acutely focused on their core business to remain competitive and at the forefronts of their industry. Access to capital in a variety of forms is critical in order to fuel industry trends and to accelerate market-driven growth strategies.
The sale-leaseback has become an increasingly popular way for companies to access capital by converting real estate assets into cash at full market value. In a sale-leaseback transaction, a real estate investment firm acquires a company's real estate assets. Typical transactions involve corporate headquarters, manufacturing facilities or other types of real estate assets. The facilities are usually acquired for their full fair-market value and then are leased back to the company on a long-term lease, allowing the company to retain operational control.
Often, sale-leasebacks are done in conjunction with an acquisition or a private equity deal, where the proceeds of the sale-leaseback are used to fund an acquisition, to implement a strategic operating or capital improvement initiative, or to recapitalize the company's balance sheet.
The beauty of a sale-leaseback, compared to traditional mortgage financing, is that the company receives 100 percent of the real estate's value, as opposed to the 50 to 75 percent of the value it receives through a mortgage. In addition, a sale-leaseback can qualify as "off balance sheet" financing by structuring the lease as an operating lease and removing both the asset and lease obligation from the firm's balance sheet. Finally, lease payments are often structured so that initial rents are relatively low (often less than depreciation and interest expenses), thereby improving a company's net earnings. Leases typically include renewal options, allowing a company either to retain operational control or to walk away from the property if it is no longer needed at the end of the lease term.
Inherently, sale-leasebacks are long-term investments. Consequently, a company must make sure that, before entering into a sale-leaseback, it understands its long-term requirements for the facility and the flexibility that needs to be structured into the lease document. Often, the cost savings of leasing, when combined with lease provisions offering future flexibility, can significantly outweigh the benefits of ownership.
Let's use a few examples to illustrate:
RV manufacturer "XYZ" is looking to acquire a competitor to solidify its competitive market position. XYZ evaluates its options and realizes it can sell and lease back its primary manufacturing facility to raise the funds necessary to fund this acquisition. XYZ sells its facility to a real estate investment firm for $30 million and uses the proceeds of the sale to fund the acquisition of its competitor without significantly increasing the amount of leverage on its balance sheet. By selling and leasing back its facility, XYZ was able to use the liquidity provided by its real estate assets to grow its business.
RV dealership "RVDL" is looking to undertake a series of upgrades to its showroom and the surrounding landscaping. However, RVDL lacks the funds to jumpstart this renovation initiative. RVDL decides to sell and lease back the dealership. The cash from the transaction enables RVDL to fund the renovation, while maintaining full operational control over the dealership.
RV manufacturer "RVM" needs to invest in new manufacturing equipment but does not have the cash available to do so. It decides to sell and lease back its corporate headquarters for $25 million and purchase the new equipment, as well as pay off some of its debt.
RV companies can use sale-leaseback financing to penetrate new markets, expand their business, fund acquisitions and pay off existing debt. Sale-leasebacks can also be used to construct new facilities — an attractive option for companies looking to expand their existing facilities or open new locations.
As more sophisticated financing techniques and structures continue to be developed, business owners, managers and financial officers need to be aware of alternatives for managing and financing their real estate assets. In the RV dealership and manufacturing industry, as well as other industries, companies need to evaluate their current and future real estate needs, financial structure, capital requirements, and performance history on a regular basis in order to avail themselves of the most attractive real estate financing options.
Sale-leaseback financing offers companies the opportunity to retain many of the benefits of real estate ownership, while simultaneously freeing up cash for redeployment in the company's core business and improving its balance sheet and financial ratios. Given that significant real estate assets are an essential component of RV manufacturers' and dealers' ongoing operations, the sale-leaseback offers a financing alternative well-suited to funding near-term growth initiatives as well as longer-term business strategies.
Benjamin P. Harris is the managing director and head of domestic investments at real estate investment firm W. P. Carey & Co. LLC. Harris can be reached at bharris@wpcarey.com or at (212) 492-8916.
author: BY BENJAMIN P. HARRIS