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 THURSDAY, AUGUST 3, 2017 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: 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 The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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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
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) 6
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). 7
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1. Recoupment of cash from real estate for operations 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, rentfree, leasing commissions), as Tenant is in-place. 9
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 on 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. 10
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. 11
3. Unless a capital lease, seller-lessee will defer immediate gain and will report it over the initial term. 4. Seller-lessee will report the lease as an ROU (right of use) asset and indebtedness on its balance sheet (unlike current treatment for tax purposes). 5. This may affect debt covenants in financings. 12
6. For many public or private investment companies this will lead to an analysis of ownership 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). 13
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 ownership 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. 14
3. Any lawful use permitted (subject to zoning and other 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. 15
Fee owned and ground leased properties eligible (See VI below--although one accounting firm has questioned whether ground leased properties qualify). 16
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). 17
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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. 19
1. The Purchase Contract 2. The Lease 3. The Loan Documents 4. Other Documents 20
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. 21
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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 preclosing, if possible). 23
1. Property administration. 2. Ongoing repair, maintenance, tax, and insurance obligations. 3. Subsequent Re-sale or Re-leasing. 24
A. Financeability of ground leases requirements (Rating Agency Requirements). B. Impact on Pricing. C. SNDA, Recognition Agreements, Other Lender Protections (Special Considerations). 25
Questions? 26
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 of later term defaults and the need to refinance the leasehold mortgage. 27
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. 28
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. 29