Financial Institutions Turn Inward to Sale/Leaseback Deals

MBA (6/6/2008 ) Murray, Michael
More companies—particularly financial institutions searching for liquidity—find commercial real estate sale/leaseback transactions advantageous during the current credit crunch and housing slump.

Companies performing sale/leaseback transactions convey property titles to a financial institution for a lump-sum payment as the new owner leases the property back to the original company.

Spirit Finance Corp., a Scottsdale, Ariz.-based real estate investment trust focusing on single tenants, said it received numerous requests from financial institutions to perform sale/leaseback transactions of their branches in the past 12-24 months. Jeff Fleischer, senior vice president of acquisitions at Spirit Finance Corp., said sale/leasebacks are an inexpensive method to raise equity.

“They are branches or processing centers, but typically the bank branch portfolios—there are a meaningful number of those that have closed—the retail systems,” Fleischer said. “[They] sell the branches, collect the proceeds and lease them back.”

For example,84 Lumber, Eighty-Four, Pa., reported it remained profitable last year but experienced a 20 percent decline in sales, stemming in part from the slump in home sales. Closing and selling off unprofitable stores was 84 Lumber’s main focus of reducing debt as it closed and/or consolidated 52 stores this year.

The company owns 85 percent of its operating locations with a nearly $650 million value and owns inventory and receivables of nearly $500 million. Many of the stores in metro-markets consolidated into nearby larger operations. In April, the firm entered into two new five-year financing packages at $590 million arranged by Sun Trust Bank, Richmond, Va., and Wachovia Bank, Charlotte, N.C.

Additionally last year, Spirit Finance completed a $200 million sale/leaseback transaction with affiliates of 84 Lumber Co. Spirit partially funded a $150 million long-term fixed-rate mortgage note financed through Barclays Capital Real Estate Inc., New York, and secured by the acquired real estate assets.

Spirit purchased 53 wholesale/retail lumber sales and supply centers and one truss manufacturing plant, and 84 Lumber agreed to lease the properties for an initial period of 20 years, subject to a master lease with a multi-windowed purchase option and multiple renewal options.

“When liquidity was plentiful, there were plenty of companies that monetized their real estate because they had a preference not to own it and it’s a better return on equity,” Fleischer said. “But when the market turns down and other forms of traditional financing are not available, it’s as simple as liquidity. For some companies, it’s an efficient way to access liquidity without diluting their equity base.”