Utilizing Sale and Leaseback in Collaboration with Regional Banks for Real Estate Financing

Sale and leaseback, as a means of financing real estate, is gaining attention not only in prime urban office spaces but also in regional areas. The off-balance (liquidity) transactions facilitated by sale and leaseback schemes initially developed with the primary goal of compressing interest-bearing debt. While debt compression remains a significant objective, recent trends have seen an increase in cases where it is employed as part of corporate real estate (CRE) strategies. This approach aims to concentrate management resources on core operations and raise funds for corporate growth. While traditionally, these transactions were primarily associated with major banks and their clients, they are now garnering attention as a financing option even among clients of regional banks.

Off-Balance (Liquidity) Transactions through Sale and Leaseback Schemes

Sale and leaseback schemes in Japan primarily evolved as a means of financing aimed at compressing interest-bearing debt, starting in the late 1990s when the deterioration of finances due to the bursting of the economic bubble became a significant issue. In a straightforward sale, control of the property transfers to the buyer. However, with the sale and leaseback approach, control of the property can be retained while accomplishing financing and debt compression goals. This has led even major banks to actively utilize this method, especially when dealing with properties like corporate headquarters buildings.

Subsequently, the real estate market has been influenced by events such as the Lehman Shock, the development of J-REITs and private REITs, and the effects of Abenomics. However, the outbreak of the novel coronavirus (COVID-19) has also had an impact on sale and leaseback transactions. Following the spread of COVID-19, as uncertainty in the corporate environment increased, several major advertising agencies, travel companies, and music companies in Tokyo opted for sale and leaseback of their headquarters buildings as a means to bolster their cash reserves.

Meanwhile, even in regional areas, companies are increasingly considering sale and leaseback in preparation for the post-COVID era. We have seen a rise in inquiries from regional banks seeking our support in these cases.

Let's take a look at the benefits for property owners and the partner financial institutions, which are often regional banks, behind these trends.

Benefits for Property Owners

Property owners enjoy several benefits, including financial advantages gained by allocating the sale proceeds of their real estate to interest-bearing debt. In addition to these financial benefits, there is a growing trend, especially in properties such as hotels, logistics facilities, and healthcare facilities (including nursing homes and hospitals), to separate ownership from operations and specialize in operation (concentration of management resources).

Furthermore, in the post-COVID landscape, even in regional areas, logistics companies that are thriving have been considering sale and leaseback of their existing properties as a means of raising funds for new projects. This is driven by a desire for business expansion, especially when the limits of fundraising through corporate loans are reached.

For Partner Financial Institutions (Regional Banks), there are advantages in Sale and Leaseback transactions.

Given the necessity of coordination with financial institutions, it is common for partner financial institutions to consider the scheme and propose it to their clients.

However, scheme composition involves various considerations, requiring examinations not only from a real estate perspective but also from legal, financial, accounting, and tax aspects. Additionally, it is essential to clarify the significance of the approach from a corporate strategic standpoint.

Services Related to Sale and Leaseback (Off-Balance) Transactions at Deloitte Tohmatsu

When advancing Sale and Leaseback transactions, it becomes crucial to have expertise not only in real estate but also in legal, accounting, and tax aspects to ensure the scheme is appropriately structured.

However, what becomes even more critical is a clear understanding of the significance of executing Sale and Leaseback transactions. Given the limited management resources, analyzing the future corporate and financial strategies and articulating the significance, not only to the company itself but also to stakeholders, is vital. Additionally, when it comes to coordination with stakeholders, including existing creditors, it is essential to develop a solid post-repayment business plan and repayment schedule.

Deloitte Tohmatsu provides comprehensive support, ranging from formulating corporate and financial strategies, post-transaction business planning, repayment schedule development, legal, accounting, and tax analysis, to transaction execution, all from a neutral standpoint.