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Is now the time for you to consider sale and leaseback?

24th July 2023
CORPORATE FINANCE ASSOCIATE

Jack Dowling

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Is now the time for you to consider sale and leaseback?
Jack Dowling
CORPORATE FINANCE ASSOCIATE

Jack Dowling

As the criteria for commercial mortgaging continues to tighten, many commercial property owners are finding themselves in a precarious position. As interest rates continue to rise, debt serviceability becomes more challenging, causing lenders to exercise their discretionary right to re-evaluate. Commercial property owners may find themselves in breach of covenant if the numbers do not add up, particularly at higher loan-to-values. Property owners should consider paying down additional equity to avoid selling their property in an unfavourable market and not realizing their investment's true potential, or disrupting their business operations and leaving them without a space to trade. Either result can be costly and, in a worst-case scenario, fatal to an otherwise thriving commercial endeavour. Enness, however, remain vigilant in this challenging market and therefore have access to a simple yet effective solution.

Sale-and-leaseback agreements are an incredibly effective strategy for commercial property owners facing this issue. Commercial property owners can afford a significant equity injection into their assets without relinquishing operational control by opting for a sale-and-leaseback arrangement. By selling their right to the property free-hold in exchange for a substantial sum and a long-lease agreement, owners will have the cash on hand necessary to reduce their outstanding debt to a level agreeable to their current lender, simultaneously granting them access to a broader range of potentially more attractive mortgaging products. With a fresh influx of equity and a new long-lease agreement in place of up to 300 years on a flexible and bespoke basis, the owner maintains long-term stability whilst business continues as usual. As these products are incredibly bespoke, this recent example should illustrate this solution's effectiveness.

A long-standing client recently approached Enness to assist with mortgaging their 130-bed hotel, which they had owned for many years. The property carried a vacant possession value of £60,000,000, with an open market value of £45,000,000. The current outstanding mortgage was around £28,000,000, and their 5-year interest-only facility was shortly ending. Despite a long and fruitful relationship with their current lender, the client was abruptly informed that he would have to find a new home for the loan. With annual rental income no longer covered by debt serviceability and limited cash due to investment in other opportunities, the client was forced to consider selling up. However, leveraging our market expertise, Enness were able to broker a sale-and-leaseback agreement worth upwards of £14,000,000 in exchange for a 250-year lease agreement, which he used to pay off half of the existing debt. While the current lender could offer a new loan at £14,000,000, the client was now better positioned to access the market, and Enness was able to secure him a more suitable and ultimately cheaper product.

If this situation seems familiar, and you own a free-hold commercial property with a value above £5,000,000, please feel free to get in touch to discuss your options.

Information contained in our case studies is for market and illustrative purposes only. In some cases, these may be made up of multiple cases and are for illustrative purposes only.

Some case studies are made up of enquiries that have come into the business, not all business completes, and the posting of a case study does not represent a completed piece of business.