Triple Net Investments LLC    

SALE/LEASEBACK INVESTMENTS

Off the Balance Sheet - Often referred to interchangeably, the terms net lease and sale/leaseback describe transactions that produce a similar result.  In a sale/leaseback, a company owns real estate, sells it to another party and net leases it back.  Cash replaces the asset on the company's balance sheet.  With a net lease transaction, a company in need of an asset leases the property from another party, who finances the purchase.  In both cases, the company receives effective control over an asset it doesn't own under a long term lease and makes lease payments off the balance sheet.

Accounting rules bar net leases from including a purchase option, allowing both sale/leaseback and straight net lease transactions to remain off balance sheet.

In a synthetic lease, a lender typically sets up a special purpose entity (SPE), which borrows money to help a company finance new construction or the purchase of an existing property.  The SPE leases the property to the company, which pays rent in the form of interest payments.  Since the transaction is priced as corporate credit, the company typically pays a low interest rate and it doesn't have to add the real estate asset or associated debt to its balance sheet.

But there is a major drawback - a synthetic lease requires the purchase of the asset at the end of a short five  to ten year lease term, unless the company is able to negotiate another synthetic lease.  That requirement makes a synthetic lease look like a loan that should appear on company balance sheets.  It is a loan for every purpose other than accounting.

For the company, it all boils down to this question.  Let's assume that you can earn 8.5% through your ownership of the real estate in which you operate your business and you can earn 20% with that same capital in the operation of your business.  Which use of your capital makes the most sense?