Sale/leaseback a logical option

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The Royal Bank Building on Portage Avenue has been involved in a sale/leaseback deal. (MIKE APORIUS/WINNIPEG FREE PRESS)

"The premise is to unlock capital and invest the money elsewhere in your business," Don White, an investment broker with Colliers Pratt McGarry, said of sale/leaseback deals, which involve a company selling its building to an investor and then leasing it back on a long-term basis -- usually 10 to 20 years.

"And I expect to see more of this because it's more difficult to obtain financing these days," White said.

Gord Taylor, associate vice-president of Cushman & Wakefield LePage Brokerage Services, agreed.

"I could certainly see that there may be more opportunities like that in the next year or two," Taylor said.

He noted mortgages will be coming up for renewal, and with financial institutions tightening up lending criteria, some companies may not like the terms their lenders are dictating. So they may opt to sell their building and lease back, he said.

Wayne Johnson, a commercial and leasing representative with Royal LePage Dynamic Real Estate, said as long as the credit crunch continues, companies will be looking for other ways to raise capital. And for some, sale/leasebacks are an option worth considering.

"It makes sense for businesses if they can use the cash (from the sale of their building) to build their own business," he said.

Sale/leaseback deals had been growing in popularity in North America in recent years because of the continent-wide real estate boom and escalating property values. Some companies were selling their real estate holdings for top dollar and using the money for things like financing expansion, paying down debt, or purchasing new equipment.

White said sale/leaseback transactions don't usually involve companies that are in financial distress and need the money to survive. That's because most investors wouldn't want to buy a property and lease it back to a company that may not be around for long.

Taylor said there haven't been a lot of sale/leaseback transactions in Winnipeg because there aren't as many suitable buildings or businesses here as there are in larger Canadian cities like Toronto, Vancouver or Calgary.

One deal in which he was involved about two years ago saw MTS Allstream sell its office buildings at 333 Main St. and 191 Pioneer Ave. to Crown Realty Investments Ltd. for $51.1 million, and then lease them back for 15 years.

The company said at the time the telecommunications firm would be using the proceeds to purchase shares of its parent company, Manitoba Telecom Services Inc.

A company spokesman said, "From our perspective, the transaction has been seamless and a success, allowing MTS to focus on its core business while allowing us to remain here in downtown Winnipeg."

White said he was involved in a deal last year where a Winnipeg manufacturing firm sold its production plant in St. Boniface Industrial Park and used the proceeds to help grow its business.

And Johnson recalled a deal about seven or eight years ago where the Royal Bank of Canada sold its office building at 220 Portage Ave. and leased back the space it occupied from the new owner.

While both those cases involved office buildings, Taylor said any future ones are more likely to involve industrial buildings. That's because there are more industrial buildings in Winnipeg that are single-tenant buildings owned by the occupant than there are single-tenant, owner-occupied office buildings. In addition to being owner-occupied, Johnson and White said the buildings must also be properties that would appeal to prospective investors.

In a recent market report on sale/leasebacks, Colliers International summed it up this way: "Real estate should be well-located for its purpose. It should also be functional by today's standards, and well-maintained. In simple terms, it needs to be marketable..."

The Colliers report noted the credit crunch isn't the only reason sale/leasebacks are worth considering.

"Demographics also tell us that many business owners are currently in the process of engineering their exits from the workforce," it said. "A sale/leaseback can work well for those that wish to maintain ownership of a business, but want to monetize the value built up in their real estate as part of their retirement fund."

White and Taylor said property owners needn't worry that the financial crisis or the collapse of the U.S. housing market has dried up the demand for good commercial properties in Canada.

"In a down economy, that's all people have an appetite to buy is the good assets." White said. "The reality is that for good income-producing properties, there is still no shortage of buyers."

Taylor conceded it might be more challenging now for investors to obtain the financing to make a purchase. But if it's a good-quality building with a financially sound, long-term tenant, most should be able to obtain a mortgage, he said.

Know of any newsworthy or interesting trends or developments in the local office, retail, or industrial real estate sectors? Let real estate reporter Murray McNeill know at the e-mail address below, or at 697-7254.

murray.mcneill@freepress.mb.ca

Republished from the Winnipeg Free Press print edition November 24, 2008 B3