Frequently Asked Questions

1.   How do net lease transactions work?
2.   Why lease versus own?
3.   Why do it now?
4.   What are the specific benefits of a long-term net lease?
5.   How can one measure the benefits of leasing versus owning and borrowing?
6.   How does leasing improve a company's access to capital markets?
7.   Is a company's operational flexibility limited by leasing properties?
8.   What is the difference between a net lease transaction and a sale-leaseback transaction?

1. How do net lease transactions work?

Using equity capital and institutional debt, U.S. Realty buys properties from owner-occupants and simultaneously leases them back to the seller. The lessee preserves operational control of the property and benefits from the immediate cash proceeds, which can be used without restriction for any other purposes.

For assets owned by third parties, U.S. Realty can buy the asset (or fund its construction), subject to a long-term lease to the ultimate credit tenant.

2. Why lease versus own?

In general, a company's investment in core or new business operations produces higher returns on assets and capital than investing in its own real estate. A company that keeps its own capital invested in real estate is effectively diverting funds from its primary business.

The true value of real estate assets is rarely recognized on a company's balance sheet or income statement, since real property is carried at its depreciated value and not marked to market. As a result, the value of corporate real estate generally is not properly reflected in a company's stock price.

A company typically is better off occupying those core assets under long-term net leases, reinvesting the freed-up cash in its core business or in a new business, and leaving the risk of real estate to others whose business is efficiently owning and financing real estate.

Recent pressures on overall corporate profitability, low stock market prices, scrutiny of corporate accounting practices, and historically low long-term interest rates, have now made long-term net leases an even more attractive financing option.

3. Why do it now?

While entering into a long-term net lease can be beneficial in almost any market, several current market conditions make it particularly compelling today:

Long-term Treasury rates (upon which long-term net lease rents are based) are still under 5% (but appear to be in an upward long-term trend).
Many real estate markets are near their cyclical peaks, making this a prudent time to sell to achieve maximum cash proceeds.

4. What are the specific benefits of a long-term net lease?

By entering into a long-term net lease, a corporation can accomplish the following:

Convert a non-earning asset to 100% unrestricted cash
Achieve fixed occupancy costs below its weighted average cost of capital, and below real estate market rents
Keep the asset off-balance sheet, and avoid the related depreciation charge
Match long-term assets with long-term, fixed-rate liabilities (no CPI or other uncertain increases in rents)
Enjoy ownership-type flexibility and control over the real estate, typically for up to 40 years
Off-load real estate risk through the right to walk away (with no payment) at the end of the lease

5. How can one measure the benefits of leasing versus owning and borrowing?

A company must maintain debt-equity ratios or risk a credit downgrade for excess borrowings. Since no company has unlimited debt capacity, additional debt must be matched on a pro-rata basis with additional equity. The benefits of leasing (freeing up debt and equity for the core business) versus owning (tying up debt and equity on the balance sheet) should be measured based upon the company's weighted average cost of capital, not at its corporate debt rate.

6. How does leasing improve a company's access to capital markets?

Net leasing allows a company to diversify funding away from bank lines and other traditional capital sources, as well as to match long-term real estate assets with long-term, fixed-rate lease obligations. The net lease provides a company with access to long-term capital for 15 years or longer. Improved financial ratios through moving assets off-balance sheet will also enhance access to capital.

7. Is a company's operational flexibility limited by leasing properties?

A net lease offers the high level of operational flexibility that companies require, such as alteration rights, rights of assignment and subletting, as well as long-term options for renewal.

8. What is the difference between a net lease transaction and a sale-leaseback transaction?

The only distinction relates to the ownership of the property immediately prior to the transaction.

In the case of the net lease transaction, the lessee does not own the property before entering into the lease. The lessor buys the property from a third party and net leases it to the lessee.
In a sale-leaseback transaction, the lessee owns the property immediately prior to the transaction, sells the property to the lessor, and simultaneously leases it back from the lessor. For FASB accounting purposes, the lessee in a sale-leaseback cannot have a "continuing involvement" in the property. A continuing involvement includes an option by the lessee to purchase the property at any price (including fair market value) or a residual interest in the property. However, the lessee may have long-term renewal options.