Three Things to Consider regarding Personal Guarantees in Commercial Leases

https://youtu.be/YEDvuhjH4Pg

 

If you’re a business person and you’re leasing commercial space, you’ve probably come across personal guarantees. Most commercial leases for high quality space include a personal guarantee.  It’s incredibly important that you understand what impact they can have to you personally and professionally. Most small businesses don’t succeed, so it’s important to have a plan for what to do if the business fails.  I always advise a business person to have an exit plan that includes some bankruptcy planning. What are you going do if the business doesn’t do well? So, if you’re signing a personal guarantee, if you’re signing in a shopping center or even you know a warehouse, flex-pay space, complex, that could be a few million dollars. And so, should your business start to fail and you have seven years left on the term of your lease and you have signed a personal guarantee, you could be on the hook for a few million dollars.

 

  • Bankruptcy Planning.  If you’ve got a long line of creditors, your landlord may not want to spend the money to go after you for that or he may have a very low probability of getting anything out of the bankruptcy but you still, when you get to that point, that’s not a great option. So, my advice is always talk to a bankruptcy attorney in advance. Usually, what that means is putting all of your assets that you want to keep in your wife’s name or your spouse’s name or a trust, it means that you’ve thought through and you only are personally connected to things that are connected to the business and that you can afford to lose. So, worst case scenario is that your business starts struggling, you get behind, and suddenly, you luck up and the only option for you is bankruptcy and your house, your car, your stocks, your rental properties, everything is in your personal name. And that means when you start trying to figure out how to work your way through the bankruptcy, the bankruptcy trustee has access to all of those assets. Please talk to a bankruptcy attorney.
  • Franchise Agreement.  Also, look at your franchise agreement. It’s a great idea to have an attorney look at your franchise agreement. Often, there’s language in there about what will happen if the business shuts down.  Worst case, the franchisor may have the right to step in and take the business.  Often the franchisor has the right but not the obligation to satisfy the lease–and this could potentially save you from having to satisfy the personal guarantee.  
  • Waiving the Guarantee.  Finally, there may be a chance with a strong balance sheet, you don’t have to sign a personal guarantee, or the corporate guarantee may be strong enough to satisfy the landlord.  That’s something that could be negotiated away by the commercial broker whose representing you on your lease.  Also, if you’re renewing the lease and you’ve been there for a long time, there may be a way, an opportunity to do away the personal guarantee.  It’s also important to remember that if you sell the business you may not be released from the personal guarantee–this needs to be a part of the conversation if you sell your business.  

Hopefully that’s helpful.  Again, this is Jonathan Aceves. Thanks for watching and have a great day!

 

The Four Primary Uses of Sale-Leasebacks

 

Today we’ll be discussing the four primary uses of sale leasebacks: Financing, Improved Returns, Balance Sheet Improvements, and Exit/Repositioning.  

 

The Four Primary Uses for Sale-Leasebacks

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building. 

 

What are your thoughts on SLBs?  Have you ever performed one?  As a growth plan, have you evaluated a SLB?  What are pros and cons in your opinion?  We’d love to hear from you.  Please comment below, share with friends, and thanks for reading! 

 

Sale Leaseback Overview and Medical Office Case Study

Sale Leaseback Overview

What is a Sale-leaseback and how could it impact your business?  A Sale-Leaseback (SLB) is when an owner of real estate sells their real estate subject to a new long-term lease, and then sells the real estate to an investor.  This can have a variety of benefits and uses including providing a means to raise capital for growth, as an effective exit-planning tool, helping improve the balance sheet, and potentially positioning owner for exit of market.  If a growing company’s returns on their core business outweighs the returns on real estate deal, then it is generally recommended to sell the real estate and invest in operations. Often terms for a sale-leaseback are preferable to debt financing, especially for a growing company.   Many national retailers, fast-food franchises, and medical practices utilize sale-leasebacks to grow their business.  A sale-leaseback analysis and comparison to debt financing should be something every executive should review for their business. 

 

The Definition

  • A Sale-Leaseback is when an owner sells their real estate to an investor, and in the same transaction leases the building back from the new owner. Typically, these leases are long-term triple-net leases. 

 

The Four Primary Uses for Sale-Leasebacks

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost.  This can allow for faster growth.
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations.
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations.
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

 

Case Study: Exit plan for Medical Office

Hypothetical case study based on real-life business: A local medical practice with an almost 40-year history is determining how to transition from the founders to the two younger partners.  The senior partner owns the building.  The business is grossing about 3.5M per year.  The building has a tax value of 1.4M.  What’s the best way for the senior partner to sell the practice and real estate? 

The building is a 10,000 SF building.  Leased at $18NNN, at an 8% discount rate, that would be a sale value of 2.25M.  Likely an investor could do a little better than that, depending on balance sheet. The 180,000 rent payment would be about 5%, which is within the industry standard of 5-7%.   The building empty would likely sell for around $160/SF, or about 1.6M.  

Executing a sale leaseback could allow the senior partner to cash out of his investment with a lump sum, and finance the business to his partners. The junior partners could also get bank debt to purchase the business and the building, potentially with SBA and competitive terms.  Often, the value of a leased asset can be higher than the value an appraiser would put on the building, and higher than the valuation a bank would put on a building.   Regardless, the value of the lease to an investor can help the senior partner set a value on the practice. 

The Medical Practice engages a commercial broker to create an analysis of the sale leaseback.  Working with a commercial lender and business financial planner, the team reviews the past three years’ tax returns, balance sheets, and P&Ls for the practice.  With this information, the team generates the analysis.  The financial planner gives an analysis of the business sale with and without the real estate.  The commercial real estate broker generates an opinion of value for the building itself and its potential value to an investor subject to a long-term lease.  Also, the commercial lender can present terms for financing for both the business and the building.  

 

What are your thoughts on SLBs?  Have you ever purchased or evaluated a SLB?  If you’re a business owner, what have been your considerations regarding SLBs?

Economists project positive 2020 economic outlook, but with a few concerns

Overall there was good news for a room full of business leaders gathered at the Marriott Hotel in Downtown Augusta.  The 2020 forecast was hosted by the Terry College of Business at UGA, and presented by Dr. Ben Ayers and Cal Wray.  

Dr. Ayers outlined a number of economic development announcements from across the state, including the Union Agener and Acoustics & Insulation Techniques announcements which themselves will bring 245 jobs to the CSRA.  

Cal Wray, president of the Augusta Economic Development Authority, noted that Augusta has experienced 8.5% population growth since 2010, and unemployment sits at historic lows near 2.9%.  With Fort Gordon continuing to expand, Augusta’s future looks bright, even as nationally and internationally there are warnings signs of an economic slowdown.  
 
For an in-depth review, real the Amanda King’s article in the Augusta Chronicle.  

What are your thoughts?  What are you seeing in the local economy?  

New Apartments Coming to Downtown Augusta and implications to Rental Rates

 

Rendering of  54 unit mixed-use development ‘The Atticus’ planned for 10th at Ellis.

 

Damon Cline reported on Monday that Downtown Augusta will see one of the first downtown multifamily projects in decades at the corner of 10th and Ellis next year.  Known as “Connell’s Corner”, and long home to the local favorite “Sandwich City”, the property will soon be the home to a new high-end four-story apartment building. 

‘It will boast a covered and gated 57-space parking lot, ground floor retail/restaurant space, a rooftop patio and high-tech features such as keyless entry – the types of amenities that appeal to urban-minded young professionals migrating to the downtown area.’

 

The story was broken by Damon Cline, who also shared some statistics and details about the overall rental market in Augusta.  Overall, apartment rents are rising quickly, and what was once considered a “Class-A”  apartment renting at $1.15-$1.25/SF/Month, has been eclipsed by new super-luxury apartments renting at $1.30-$1.40/SF/Month.  This new class of apartments come equipped with similar finishes found in luxury homes, including granite and high-end appliances.

 

We recently discussed charting rent curves and what they tell us about rent rates and forecasting rent rates.  I think this is a great case study.  Here’s what the rent curves for downtown apartments looks like:

You can download the spreadsheet here.   These are asking rates at the major downtown apartment complexes vs. downtown lofts and upstairs apartments.  You can see a big difference between the two.  I think what we’re seeing is that the curves are moving out–driven by a higher demand for downtown apartments like Canalside and Ironwood.  My guess is that the Atticus could probably plot a new curve–maybe ask $2.15 for their smallest units, and maybe $1.50-$1.65 for their larger ones.  If they’re successful with this project, I think we’ll start to see redevelopment of buildings that have up to now been impossible to redevelop with existing rental rates.  

 

What are your thoughts?  What are your observations about Augusta’s rental market?  Do you think Downtown will continue to grow and develop?  

Using Rent Curves to Study Multifamily Rental Rates

This is Jonathan Aceves with Meybohm Commercial Real Estate, advising business leaders and helping them make wise real estate decisions.  Today we’re going to be discussing Multifamily Rent Curves.  

 

How does one set out to study multifamily rental rates?  We do this by building a rent curve.  Let’s say you want to study the rental rates for housing in Martinez, GA.  We would do a survey of rental rates at apartment complexes in the area, and plot them on a graph.  The graph would start out looking like this:

Then we would separate them by class.  Class is a ranking system given to multifamily properties by investors, generally A, B, C, and D.  A properties are generally newer, amenitized, and really nice.  B properties are usually good, but maybe a little older, maybe not the same level of amenities.  C properties are in not-so-great areas, in fair condition, usually schools aren’t so good.  D properties are in bad condition and really rough areas, these are the kind that you wouldn’t go to at night.  Once you’ve broken them apart by class, you draw a curve over them.  You would end up with something like this:

 

It is interesting to note the steepness of the curve, and the distance between the different curves.  Another thing to note is that market changes shift the curves.  This is what we see in rapidly gentrifying areas—the entire curve moves out.

 

So how do you use the rent curve?  Well this helps investors identify opportunities for repositioning.  It also helps you identify management problems.  If I see a complex with below-market rents, I try to figure out why.  Is it a problem that an investor can fix?  

 

Thanks for reading!  Please like and share with those you think might benefit from this.  We’d love to hear from you! What are your thoughts about rental rates? 

 

 

Lessons from Sharedspace in Augusta

Today we’re going to talk about SharedSpace and Coworking with John Cates, COO and General Counsel at Meybohm Real Estate

 

Jonathan Aceves (JA): Tell us a little about your prior experience with the coworking business model.

John Cates (JC): When i was in Atlanta, coworking was just starting to take off.  Not just from a office space model but also as a model of entrepreneurship.  Coworking space like WeWork and others that were purely office tenant landlords but also incubator space.  We were involved with helping the Atlanta Technology Village to get started.  We got to see in Atlanta over a six or seven year period,  the coworking model take shape in all its different forms.  

JA: What was your connection to SharedSpace?

JC: I was approached by the SharedSpace group before they got started as they were looking for different space in Downtown Augusta.  We had some mutual connections from my time in Atlanta.  And they really reached out to me to try to get some advice as to pricing and location and what I thought would work and what wouldn’t work here. I guess a little bit like a sounding board.  They actually approached us about potentially getting involved both from a personal and company standpoint. 

JA: What was your advice at the time in setting up that business?

I think the first thing is that coworking takes different forms depending on the area that you’re in.  So coworking in place like Augusta or you call a secondary market is very different from coworking in Atlanta.  Your pricing needs to be different. Your sizing needs to be different.  The companies yo are going to attract are very different.  And pricing is probably the most important because when you’re dealing with a space like SharedSpace over on Greene Street when you can go over to Broad Street and get a comparable office space.   So i think Coworking is an asset class in and of itself outside of office space and is very unique.  And one of the things I really tried to explain to them was that Augusta is not like Atlanta. That’s not a good or bad thing–it’s just a fact.  Some of the other things were that you need to be really, really careful about how you program the space, because coworking space really only works when it’s programmed properly.  Nobody wants to be in a coworking space by themselves.  You have to create a pretty inviting and exciting entrepreneurial community where you’ve got several people doing different things.  There has to be a good energy there.  And so i think that you really have to do a good job of programming certain events to give people a reason to want to be there, because a lot of people who are there are likely either working at home or they’re working somewhere else.  So you want to build that community, I think that was it.  And one of the parts where I initially tried to offer some advice in addition to that was getting the size correct.  

JA: Do you think we’re seeing a paradigm shift in the coworking space?  Are consumers changing the way they office?  We’ve seen the fall of WeWork, and now this.  What are your thoughts in general about the coworking model?  

JC: I don’t think so. I don’t think it’s the model. I don’t think wework’s struggles through their IPO are really a true reflection of the health of the coworking space and the coworking industry.  Again i think it works, but it has got to be done smaller, then growing larger. That was one of the biggest things that I didn’t necessarily agree with about SharedSpace was that I thought they went too big too fast.  Nobody wants to go into one of these spaces to be alone and what my advice was initially was pick a smaller space, maybe 3000, 4000, 5000 square feet–to be bursting at the seams.  Program it, get people in there, and have a waiting list.  Then once you’ve got that demand there and that community built, then you can transport it to a bigger space.  But by not having the right programming up front, by taking a space that was too big, I think this deincentivized people from wanting to be in there, because nobody wanted to be in there and hear their own voices echo.  So you’ve got to balance the cultural aspect of coworking space with the size of it itself.  Then the other thing is that if someone can go to Broad street, which is two blocks from there and a potentially more desirable location than Greene Street,  and get a location for about the same price for a company of three or four people, then that’s what they’re going to do.  So there’s still a decent amount of good office like that one on Broad Street.  So I don’t know how appealing it would be to me as a small business or as a freelancer to locate my business in there.  And I think what happened was that they ended up getting a few smaller versions of call centers.  And that goes against the whole entrepreneurial atmosphere that you’re trying to create.  

JA: What implications does this business case have for downtown business and retail?  

JC: Well I think the first thing is to understand why it happened.  Just because the concept didn’t work, doesn’t mean that coworking can’t work in Augusta.  There’s a significant demand for it.  And I think one of the things that we saw when I was involved in the Augusta Innovation Zone was that we also got to the point where we were almost going to be in a place that was too big.  And that’s why it didn’t work in the Woolworth building when we were were looking at that a few years ago, and we felt that there was a huge need for it.  And we had a waiting list.  But you had to start smaller to prove out the concept.  So I don’t want people to take away that this model doesn’t work in a market like Augusta.  It does.  You just cannot start to big and your pricing needs to be reflective of the market–it’s got to be lower than what you can otherwise get on Broad street or somewhere else.  The other thing is that the model really should work when you’re trying to also use the space to create new businesses.  So i think it’s one thing that the Clubhou.se has done really well.  And you know–they’re bursting at the seams, and as you know they’re located in the Cyber Center and doing great.  But that’s because the pricing is right.  The location is right, and I think they’ve proven that if you can partner with the right people and get entrepreneurs in that space and activated, that it works.  So that would be my only big takeaway is don’t look at this and say that the concept doesn’t work because it is working.  It just has to be done right.  The Clubhou.se has done a really good job proving that the concept does work. 

JA: Those are great lessons.  

 

A big lesson is the value of good advice–and how important it is as advisors to tell the hard truth to our clients.  What other lessons can you learn from this business case?  What are your thoughts about Coworkign in Augusta?  What is working?  What are lessons you’ve learned in launching a new enterprise? 

GA Power gives $50K to DDA for Downtown Storefront Improvements

Georgia Power is starting off 2020 with a pledge of $50,000 toward storefront improvements in downtown Augusta.  This is more than triple what they have donated in the past. For the previous two years they have donated $15,000 each year which was used to create a  facade matching-grant program. It has helped with projects but it has gone quickly.

 

The company’s regional external affairs manager, Stephen King, presented the Augusta Downtown Development Authority with the symbolic check.  He said, “It doesn’t come with any stipulations other than for the growth and development of downtown.” The program developed is a matching-grant program that offers up to $5,000 to downtown business owners who invest an equal amount in exterior improvements to their spaces.

 

For more details see Augusta Chronicle Article: https://www.augustachronicle.com/business/20200109/georgia-power-donates-50000-to-downtown-improvements?template=ampart

 

Contact the DDA for more information on how to apply for the grant: 

http://www.myaugustadowntown.com/

AU Hospital Decision Delayed Again

Decision on AU Health’s ability to build a hospital in Columbia County has been delayed again.  It has been nearly a year since the court ruled in favor of AU’s Certificate of Need to build in Columbia County but appeals have stopped them from moving forward.

 

 “Columbia County is really one of the fastest and largest counties in Georgia  that does not have it’s own hospital,” says Madeline Wills, general counsel at AU Health. 

 

Read the WJBF article: 

https://www.wjbf.com/csra-news/georgia-supreme-court-decision-delays-au-hospital-in-columbia-county/

 

What are your thoughts?  Does Columbia County need a hospital?  What impact will it have to the CSRA to have another hospital?

Depot developer Bloc Global threatens to walk from Downtown deal

Today the Augusta Chronicle reported that it looks like the proposed $94 million dollar Augusta Riverfront Depot project is teetering on the edge of collapse.  Bloc Global, the developer, has asked for the return of their $50,000 held in escrow, or they will terminate from the deal.  

 

In 2016, the commission authorized the city DDA to market a 6.3-acre riverfront parcel at the corner of Reynolds and Sixth streets and we later learned of a pretty major conflict over the employee parking lot at the site that was provided for Unisys Corp the year before. 

 

What are your thoughts on this project?  What do you think will be the result?  

 

Read the full story:

https://www.augustachronicle.com/news/20200107/depot-developers-threaten-to-withdraw-from-deal