During our recent webinar on REIT financing where we discussed the pros and cons of using the more traditional sale/leaseback structure, we posed a few questions to the audience. Let’s just say, the answers surprised us.
The first was whether, if choosing REIT financing today, they would prefer the traditional sale/leaseback structure which involves fixed lease payments that increase every year, or the newer RIDEA structure, where they enter into a joint venture with the REIT and manage the properties for the joint venture. We assumed that most people would prefer the RIDEA structure given the nature of the sale/leaseback structure with 2.5% to 3.0% annual escalators. Wrong. A slight majority (53%) preferred the RIDEA structure.
The second question involved the sale/leaseback structure. We asked which was more important to them, minimizing the annual lease escalators, or having a fixed buy-out price they could take advantage of at the end of the lease term? One of our criticisms in the past has been that the tenant (seller) did not have sufficient incentives to increase cash flow, and thus value, because the value increase went to the landlord.
As it turns out, only 31% of the attendees thought this was the important issue. More than two-thirds wanted to minimize the annual lease escalators. This makes sense, since several years into any lease, these escalators can cause some financial problems, as we have seen with several of the large companies. We suppose that once a provider has completed the sale/leaseback, and with the assumption of a nice profit on that sale, buying the property back in 10 years or so becomes less important. The capital profit has been made, and they just want to make a sufficient profit above the lease payments going forward. It is when that “sufficient profit” is jeopardized that they become concerned. And that should be the concern because it is in the present and not five or 10 years in the future when they might buy the property back.
