Growing trend of sale and leasebacks

11:23 AM Wednesday September 12, 2018 Colin Taylor

NZ Brush sold its building at 305b Neilson St, Onehunga, in a leaseback deal. Photo / Supplied

Selling company owned land and buildings and then leasing former properties back from the buyers is becoming an increasingly popular trend among New Zealand businesses.

“Sale and leasebacks are often a catalyst for business growth,” says Ryan Johnson, National Director Commercial and Industrial for Bayleys Real Estate.

“Rather than have to contend with the hassles and distractions of being their own landlords or property managers, sale and leaseback deals enable business owners to release capital tied up in their properties and to concentrate on their core entrepreneurial activities.”

Johnson says that other common reasons for property and business owners embarking down the sale and leaseback path include:

  • increasing a company's value by redirecting the proceeds from the sale of real estate into improving productivity, purchase of new plant/stock, paying off debt or to facilitate a merger/acquisition;
  • leveraging off the tax-deduction clause of rent expenses versus property depreciation and interest payment deductions;
  • seeking an improvement in the bottom line and figures around return-on-assets, return-on-equity, debt-to-equity and asset-to-liability ratios; and
  • off-setting net operating losses.

Johnson says that owner-occupiers intending to put their properties up for sale and leaseback need to consider the “potential buyer dynamic” for their properties.

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Connexwire now has a 10-year lease on its Mt Wellington office and warehouse building. Photo / Supplied

“For example, business vendors who want to occupy their properties long-term as tenants,  should target investment grade purchasers who are attracted by high-quality buildings with leases of nine to 12 years, several renewals, strong tenant covenants and good rent returns,” he says.

“However, if prospective business property vendors are looking to expand, retrench, or change the direction of their companies, they don’t want to get locked into the restrictions of long-term leases. So, their marketing campaigns should target developers seeking short-term rental properties that will provide ‘holding income’ while the developers plan the future development of the sites and obtain the necessary consents.”

Johnson cites the sale and leaseback example of electrical wiring and switch manufacturing firm Connexwire which signed up to a sale and leaseback agreement earlier this year allowing the Auckland-based business to increase its export channels into the North American market.

Connexwire now has a 10-year lease on its 1174sq m office and warehouse building on 2100sq m of Industrial zoned land in Mt Wellington.

The company’s founder and director Matt Williams says the sale of its property was best used to expand and evolve the business.

“I decided that rather than have millions tied up in bricks and mortar, that the money could be better used to grow the business into new markets.

“I believe that we made the proposition attractive for investors, so it’s not a matter of good luck. The property was recently refurbished and, a long lease with reviews built in, means both parties can proceed with certainty and a high degree of confidence.”

Another successful sale and leaseback deal quoted by Ryan is that of Dunedin-based industrial and commercial brush manufacturing company NZ Brush which recently sold its high-profile Auckland premises in Onehunga, with a leaseback clause in place.

Director Ian McPherson says that the NZ Brush board is “debt-averse” so the sale of the Auckland building allowed the clearance of the company’s debt and provided a strong cash base to continue NZ Brush’s nationwide growth.

“The Auckland management team was, frankly, appalled at the thought of having to relocate the business and was only mollified when we assured them we would only sell the property if we could negotiate and settle on suitable leaseback terms,” McPerson says.

“By establishing a nine-year lease, it guaranteed that we still had control of what we perceive as the perfect location for our Auckland branch.”

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Ryan Johnson of Bayleys.