UK: Leveraged Leasing - Property Assets Get A New Lease Of Life

Many UK corporates are looking for new ways of unlocking the financial value of their property assets. This is not a straightforward task at a time when the property recession is still adversely affecting values, and the banking sector's appetite for new property debt remains small. All businesses occupy property yet a very small proportion of them would consider that property was part of their core business. The result is that countless companies are sitting on substantial assets which are not being sweated and, in many cases, are untapped sources of funds which could be better utilised elsewhere in the business.

Traditionally, the corporate property owner looking to raise money against operational properties took the sale-and-leaseback route: selling the property to an investor while simultaneously taking a lease which guaranteed the purchaser income. It is a simple solution but one which can have drawbacks for both parties. The occupier has to forego future growth in the value of the property and invariably has to agree to take at least a 10 or 15 year lease with, typically, five-year upward-only rent reviews. This makes it difficult for the company to quantify future rental costs. Such deals also see management control of the buildings pass to the owner; a potentially frustrating experience for an occupier who wants tailor-made, flexible use of a building without having to defer to a second party.

Above all this, the greatest problem with the sale-and-leaseback route is that because it focuses so heavily on property values and future rental growth, capital values are heavily dependant on the state of the prevailing property market.

In the US, there has for some time been a mechanism which provides the benefits (and more) of sale-and-leaseback without yields directly reflecting the state of the property market: it is called leveraged leasing. This technique for unlocking capital tied up in physical assets raises about $7-8bn of corporate finance every year. It is a method of financing which is essentially a finance transaction and not a property transaction. Pricing is driven largely by the occupiers' covenant strength rather than property values. It is particularly efficient for US investors because companies can depreciate all their buildings and claim tax-relief on the depreciation charge. Accordingly, a US company with surplus cash and tax capacity can make its cash work by purchasing property and leasing it back to the occupier.

It might appear that, as the depreciation factor is particular to the US, the technique could not be put to work on property outside America. However, because of the tax treaties that exist between the USA and the UK, a structure can be developed which utilises American funds to purchase UK properties and whereby all parties enjoy the same advantages as if the deal had been conducted in America. The differences in structure between a leveraged leasing deal and a traditional sale-and-leaseback vividly illustrate the additional benefits available to both the US investor and the UK occupier.

A typical US-UK leveraged leasing deal would look something like this: the UK corporate occupier sells its operational property to a "special-purpose vehicle" which has been financed by equity from a US corporate and additional funding coming from, typically, a bank syndicate. The beauty of the system for the US corporate is that, although they only have to put up around 10-20% of the purchase price (the remainder being bank money) they receive tax depreciation allowance on the full value of the property being bought.

The are several attractions for the occupier. First, the lease granted in a typical leveraged leasing deal will be for 25 years, but not with the usual five-year upward-only rent reviews. Rental levels over the term - or the mechanism for how those levels will rise - are agreed at the outset; allowing the occupier to know what their rental liabilities will be for the next 25 years. The second benefit is that management control of the buildings remains with the occupier; the investor does not care how the buildings are managed as long as the rental income flows. This attitude is because leveraged leasing deals are about finance rather than property: in most deals the tenant can, after 25 years, exercise an option to buy-back the property for a pre-arranged sum. In short, the investor gets a highly tax-efficient, management-unintensive investment producing regular income (which services the purchase loan). The occupier gets an off-balance sheet agreement which secures rental costs over 25 years, retains full autonomy over the buildings and has the prospect of regaining the asset at a fixed cost at the end of the term.

Perhaps most importantly because leveraged leasing deals are "finance-driven" and not property-orientated they can be applied to a wide range of properties. In the past, institutional investors have attributed higher yields to "difficult" properties such as hotels, pubs, leisure centres, cinemas, large industrial premises etc. because of the uncertainties over rental growth and demand. But with a leveraged leasing deal, as long as the occupiers' covenant is strong, the US investor will have an appetite for any type of property - possibly even local authority assets.

Nabarro Nathanson, together with clients who are veterans of US leveraged leasing, are now pioneering this structure in Europe. So far, although UK corporates have been cautious to explore the system, $250m-worth of deals have already been concluded. Exhaustive preparation has gone into designing the legal and tax structures necessary to make these cross-border deals work. Now that the ground work has been completed there is no reason why the flow of deals should not quicken. Leveraged leasing offers an excellent way of bringing US funds into the UK property market while allowing corporate occupiers new financial resources to apply to their core business.

Detailed specific advice should be obtained before taking or refraining from any action as a result of the comments made in this article which are only intended as a brief introduction to the particular subject. Nabarro Nathanson is regulated in the conduct of investment business by the Law Society.

For further advice from Malcolm Finney on 0171 491 6788, Kevin Wheeler, Nabarro Nathanson, Tel 0171 491 6982.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions