established providers to release capital. Courteney Donaldson, director
and head of childcare at Christie & Co, sets out the detail.
Sale-and-leaseback has been a decades-old method to raise funds, particularly across the hotel and care sectors. While there have been many successes, the failures of such financial models often receive greater attention. The collapse of Britain's largest care home operator, Southern Cross, in 2011 was one. In the nursery sector, a 2006 deal saw the UK's largest nursery chain, Busy Bees, become the first major childcare provider to complete a sale-and-leaseback transaction, raising £2.2m. The aim was to finance the chain's expansion strategy. It was made possible by the launch of the first bespoke financial product for childcare providers in 2005, from Nexus Group, which provided a £50m pot through its Pine fund, a unit trust based in Jersey.
As the name suggests, sale-and-leaseback is a financial transaction whereby a freeholder sells the freehold interest in an asset (such as a nursery building) and leases it back from the purchaser. These leases are usually long-term (normally in excess of 15 years). So, if a childcare provider owns the freehold of the property from which they trade, be they a limited company or private individual, they can raise money via a sale of the freehold, while continuing to use the property to run their business.
Advantages
As well as providing capital, the technique is a way of avoiding potentially costly bank loans or the need to find investment from a third party.
Capital raised by sale-and-leaseback transactions is often used to fund expansion and acquisitions. It can also be used for any purpose where a cash injection is needed. In 2006, principally in order to repay £10m of bank debt, Nord Anglia concluded a £12.5m sale-and-leaseback deal on seven nurseries.
Also, if a childcare provider agrees terms on an IRI lease (Internal Repairing and Insuring, whereby the landlord maintains, repairs and insures the structure) rather than an FRI lease (Full Repairing and Insuring, whereby the tenant is responsible for all external and internal maintenance, as well as having liability for insuring the building), their property maintenance costs could decrease.
Disadvantages
It is very important to note that, as a tenant or lessee, your rights, compared with those of a freeholder, change significantly. Should you ever need to raise a bank loan against your lease, the loan to value (LTV) ratio would be substantially below the potential LTV ratio of a freehold asset.
Also, sale-and-leaseback means that your profit margins will be hit. In technical language, your Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) will reduce as rental payments commence.
Should you ever decide to sell your nursery business, the terms of the lease that you enter will be of the highest importance and will determine the price that a buyer may be willing to pay for that lease.
The market
The downturn in the UK property market during the recent recession led to a slowdown in sale-and-leaseback activity. But, with the economic landscape and markets improving and asset values regaining pace once more, investors are re-entering the sector. Sale-and-leaseback continues to be popular, particularly with nursery owners seeking to fund acquisitions and facilitate expansion.
On entering any transaction, freeholders need to consider what is best for them depending on the specifics of each deal, their personal circumstances and their long-term business strategy.
Sale-and-leaseback for an uninitiated nursery owner can be a complex area. While you would naturally seek the services of your financial advisor and solicitor, a specialist chartered surveyor who understands nursery asset transactions and landlord and tenant relationships is also essential to getting a good deal.
More information
Contact courteney.donaldson@christie.com.
