Sale and leaseback – an option to raise capital

Sale and leaseback is a type of real estate transaction whereby the owner of existing property who is simultaneously its occupier sells this property or a stake in it and signs a long-term lease with the buyer. As a result, the previous owner loses the ownership title to the property but it remains the user of the space.

Advantages for the seller:

• The main advantage of entering into a sale and leaseback transaction is the opportunity to free up capital tied up in real estate and to subsequently use it to either expand the business or pay down the company’s liabilities. A sale and leaseback contract can be an element of a company’s restructuring program aimed at improving the liquidity of the business.
• Sale and leaseback can be an alternative to bank financing, with the latter becoming more difficult to obtain in current market conditions. It is worth noting that the project is subject to successful due diligence conducted by the investor, including an assessment of the quality and risk level of the potential tenancy along with the financial situation and growth prospects of the current owner and future occupier. Investors’ criteria are however often less stringent than those of banks.
• In particular situations, sale and leaseback can be a means of tax optimisation. It allows a business to replace its relatively low cost of real estate amortisation with a relatively higher cost of tenancy.

Advantages for the buyer:

• For the buyer, a sale and leaseback transaction is an opportunity to invest in a property that generates stable income over a long term and is occupied by a reputable company with a low risk of default. For these reasons, such a product is particularly attractive to pension and insurance funds – long-term investors with a low risk profile who seek stable and predictable cash flows.
• A sale and leaseback transaction has a low operational risk as it concerns existing, working assets that are fully verifiable.
• In periods when access to financing is limited, more high-risk opportunistic investors also seek sale and leaseback investments. Due to their higher risk tolerance, such investors are able to enter into contracts with companies whose financial situation and credit worthiness is poorer.

Total occupancy costs include:

• Rent paid per square meter of space and office. Both are typically quoted in EUR but can be paid in PLN, after appropriate conversion based on the current central bank exchange rate;
• Service charge per square meter of space and office – quoted and paid in PLN. It is a charge that covers the costs of maintenance and daily running of the building, including taxes, insurance, cleaning, maintenance of access roads, security of external areas, lighting of communal areas, snow clearing as well as land and property taxes.
• Utility costs: charged based on usage.

The following additional standards for tenancy agreements exist on the Polish market:

• Rent is paid each month upfront;
• The rental rate is typically quoted in EUR;
• Rent is subject to annual indexation, typically based on the rate of inflation.
• The lease term is typically longer for sale and leaseback transactions compared to the market standard, at 10 years and more. Usually the longer the contractual lease, the more attractive terms the occupier is able to negotiate.
• Improvements made to the building during the lease that exceed the developer standard incur an additional cost;
• Tenancy agreement requires a bank guarantee and a guarantee from the mother company.

Please don’t hesitate to contact the Investment Team at AXI IMMO in order to discuss the full range of services on offer. We have relationships with a number of international organisations interested in investing in the logistics and industrial real estate sector in Poland and the wider CEE region.

Contact

Renata Osiecka

Managing Partner AXI IMMO

renata.osiecka@axiimmo.com