Sale Leasebacks

Welcome to the 75th Pari Passu Newsletter.

After learning about The Double Restructuring of Party City Holdco last week, today we are learning about a technical concept: sale-leasebacks.

Imagine that you are a fast-food restaurant franchisee and that you operate and own 14 stores and the land they sit on. One day, you get a letter from your corporate partner, who just launched a new strategic initiative, asking you to remodel and update all 14 of your stores. The total cost of the renovations is $2mm, which you do not have. Unfortunately, based on your franchise agreement, you cannot push back on the corporate partner’s demands, or else you risk fines, penalties, or even the loss of your license. Additionally, since you borrowed money to help you acquire new stores over time, the business already has a significant amount of debt on it, and you do not want to borrow more to pay for the renovations. What would you do?

One solution to finance the remodel is the topic of today’s post: “sale-leaseback”

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Sale-leaseback Overview

Let’s get to the post. A sale-leaseback is an arrangement in which a company sells an asset, which it then leases back from the purchaser. The details of this arrangement, such as the lease payments and lease duration, are made immediately after the sale of the asset. While any high-cost, fixed assets–like equipment and machinery, fleet vehicles, and IT Infrastructure–can be used in a sale-leaseback, real estate holdings are typically the most common. Sale leasebacks have become increasingly common (and contentious) for several reasons that we will explore further in this article [1, 2, 6].

Source: SLB Capital Advisors, Wall Street Prep

In the case of the fast food franchisee example, you could sell your 14 physical buildings and land, either individually or at once, to a real estate investor for current market prices. You would then (effectively simultaneously) sign a series of long-term real estate leases with the acquiring real estate investor to lease the space back. Let’s assume that the land was sold for $2mm in the transaction. Now, you can cover the total cost of renovations without needing to inject fresh capital into the business, or even worse, potentially needing to sell it due to a lack of liquidity. Now, not much will have changed operationally. You still own the franchise business and make money from it. However, you do not own the land anymore and instead have to make the agreed-upon lease payments to your new landlord, the real estate investor who acquired your physical store buildings and land [1, 2].

Structure of a sale-leaseback

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