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!

 

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?

Development Authority negotiates Greenjackets Stadium Lease

 

The former home of the Augusta Greenjackets is getting a second life. Last week Augusta leaders agreed on a deal to bring more entertainment to the Augusta area. A 10-year master lease agreement to bring big acts and events to the Lake Olmstead Stadium will have us seeing the area around Lake Olmstead transformed starting this April. The Augusta Commission voted and approved for the Augusta Development Authority’s “stadium master lease” of the facilities. C4 Live, the subtenant, will be spending hundreds of thousands of dollars to make upgrades to the structure and in addition to Masters Week, we can expect other entertainment events through out the year. This is great news for Augusta and this piece of land getting a second life!

 

What’s a master lease, you may ask?  Here’s Bigger Pocket’s summary, but in short, it’s when an owner leases a space to a tenant who then has the right to sublease to another tenant.  The city of Augusta will lease to the EDA, who in turn will lease to C4 Live.  This is generally good when the landlord trusts the master tenant, but has no relationship to the subtenant–the master tenant is guaranteeing the performance of the lease.  

 

 

https://www.augustachronicle.com/news/20200108/entertainment-company-approved-to-bring-events-to-olmstead-stadium

 

https://www.wrdw.com/content/news/Augusta-leaders-strike-10-year-deal-for-acts-at-Lake-Olmstead-Stadium-for-Masters-Week-566840601.html

Augusta Medical Office Building Market Report

 

This is Jonathan Aceves wth Meybohm Commerical here with a brief update on the Medical office market. Click here to download the Report.  

 

Overall, well-located and in good condition, medical office space in Augusta is leasing for around $18/SF, and selling for around $150/SF.  As expected, offices in Evans commanded a premium (around $200/SF), and offices around Trinity sold at a discount ($120/SF).  This is slightly higher than standard office space, and tends to be clustered around hospital facilities:  University, Doctors, AU Health, and Trinity(University Hospital Summerville)

 

One outlier that we see is with the rise of Urgent and Prompt Care clinics, which tend to lease in line with NNN leased retail space.  We are seeing them leasing at around $30/SF NNN and trading at corporately-guaranteed retail cap rates. There has definitely been a rise in Medical/Dental/Physical Therapy providers taking space in shopping centers and even developing practices on retail out-parcels.  The impact is that these lease rates fall in line with their competitors for these spaces.  

 

POB Buildings.  The POB buildings are a good milestone–what would it cost a physician to locate inside the hospital complex, with a full-service lease?  Asking rates there tend to be around $25/SF Full Service, potentially you could lease space there between $20-21/SF.  If we back out the full-service items, it’s a helpful comparison.  That might get us to a rate around 18/SF. 

 

Renovation of office buildings.  Another helpful number is what would it cost a physician or dentist to purchase a 4000 SF building and convert it to a medical practice?  Our guess is that in good condition, it would cost around $25/SF. so in theory an office building could be purchased and 100-150K invested in it to make the conversion.  Alternatively, an office could be leased, and the improvements amortized into the rent, which would equate to 4-5/SF/YR on the rate.  At those numbers, it is slightly more cost-efficient to lease or purchase an existing medical office than to convert an office building into a  practice (which makes sense).  

 

On a related note, we are seeing a large demand for purchase of NNN leased medical office space.  If you own a practice and the real estate, it may be a great retirement planning tool to investigate the value of leasing back the building and selling the real estate.   Also if you are selling your practice or looking towards retirement, it might be a good idea to sell the practice along with a  lease on the building, and then sell the leased building. That may be a great way to cash out of your investment and give your new partners a fixed and budgetable cost.

 

Notable Sale:

Augusta GYN sold their building earlier this year to University Hospital.  

 

Notable Lease:  

Pruitt Health.  12.60/FT, Modified Gross.  1220 Augusta West Parkway.  

 

Thanks for reading!  Please let us know your thoughts on the market for medical office buildings.  What are you seeing?  What’s your experience been?