Real Estate Sale Lease BackCreating a Sale Leaseback Financial Analysis- To create an apples-to-apples analysis, the Status Quo and Refinancing alternatives need to assume the property is sold at the end of the analysis period. Since when the lease part of a Sale Leaseback ends, the tenant may choose to renew or relocate, the Status Quo and Refinance alternatives need to assume similar sale assumptions at the end of the analysis period. That is, the building is sold and the choices are to either stay or relocate. This does NOT mean the building will be sold, but for analysis purposes, it must be assumed it will be sold. Accordingly, at the end of the analysis period the choices are to stay or relocate with no contractual obligation (i.e., lease or ownership) to stay in the building. - You can view a LseMod sample report or download a full report.
- There are two kinds of costs to be compared, the Profit & Loss (P&L) / Income Statement cost and the Before and After Tax Cash Flows. - The P&L Impact is the income/costs reported to the IRS and used for paying taxes. In a public corporation, it is the number used in the EPS (earnings per share) calculations, which is determined under GAAP accounting. Typically the annual P&L cost is higher in the lease portion of a Sale Leaseback when compared to Status Quo since rent is being paid vs. depreciation charges in Status Quo and Refinance alternatives. Care needs to be taken since the TOTAL P&L impact can be misleading when compared to the ANNUAL P&L impact. The total P&L impact is biased in favor of the Status Quo and Refinance alternatives because they may use a value of the building that has appreciated over time, thus making the value "high" (i.e., a large number) when compared to it's value today in today's dollars. Consequently, the NPV (net present value) is a superior metric. - The Gain / (Loss) incurred in a Sale Leaseback is usually spread over the term of the lease for GAAP purposes, thus impacting the book (GAAP) tax calculations, which in turn, impact the After Tax Cash Flow. - Cash Flow represents the cash received and less any cash paid out as expense. In a Sale Leaseback scenario, cash is usually higher (more) when compared to Status Quo and Refinance alternatives because of the receipt of the cash from selling the property. However, as in the P&L comparison, care needs to be taken since the TOTAL Cash impact can be misleading when compared to the ANNUAL Cash impact. The total Cash impact is biased in favor of the Status Quo and Refinance alternatives because they may use a value of the building that has appreciated over time, thus making the value "high" (i.e., a large number) when compared to it's value today in today's dollars. - The Net Present Value (NPV) before and after taxes is probably the best one item comparison metric since it takes into account the time value of money, thus adjusting for a high building sale value used at the end of the analysis period in the Status Quo and Refinance scenarios. Looking at the NPV on an after tax basis also takes into account the accounting treatment and IRS rules for a Sale Leaseback. - Since cost and income have different signs (that is showing as positive and negative numbers, or visa versa), it is important to "study" the actual numbers for each scenario before jumping to a comparison that shows the differences. - If a property is refinanced or sold and then leased back, there is usually a net cash in-flow to the original owner. The issue is how to include any income from that cash in the financial analyses. An option is to include the income from investing the cash. The cash is invested at an assumed interest rate and the after-tax income is then compounded over the term of the analysis at this interest rate. - You can view a sample report or download a full report.
- Care needs to be taken when valuing a property at the end of the analysis period in the Status Quo and Refinance scenarios. In those scenarios, it is assumed (for apples-to-apples comparison purposes) that the property is sold and the owner moves out, which means there is no tenant! A building without a tenant is worth less than a building with a tenant. Consequently, one cannot always assume a building will appreciate in value since commercial real estate properties are usually valued based on the income stream. Without a tenant, there is no income steam! Other Topics About Real Estate Sale LeasebackWhat Is a Sale Leaseback? Advantages of a Sale Leaseback to the Seller / User Disadvantages of a Sale Leaseback to the Seller / User Strategic and Operating Considerations for the Seller / User Advantages of a Sale Leaseback to the Investor Disadvantages of a Sale Leaseback for the Investor Key Elements and Assumptions in Analyzing a Sale Leaseback Creating a Sale Leaseback Financial Analysis Sale Leaseback Accounting Bottom Line Caution
© 2007 James R. Duport, All rights
reserved. You are free to use the material above in whole or in part, as long as you include
complete attribution, including a live web site link. Please also notify me where the material
will appear. The attribution should read: "By James R. Duport, President of LseMod. Please
visit our web site at http://www.LseMod.com for information on our site selection financial
analysis software for commercial real estate. LseMod, the professional’s choice since 1996, is lease
modeling made easy - easy to use, easy to understand, easy to explain."
| 
