Case Study: Premises Sale & Leaseback for Digital Arena
Structuring the sale and leaseback to maximise the equity unlocked
Premises Sale and Leaseback for Digital Arena
Releasing Equity through sale and leaseback
Digital Arena is the IT services and retail automation specialist behind various household brands in the marketing, communications and retail industries in New Zealand.
If you have booked a flight, filled up with petrol, or done home DIY, you have probably experienced their retail automation.
After 17 years of owning the premises, Digital Arena’s director decided to release the equity accrued in its commercial office premises.
Based on Marcus’s previous experience managing the National Bank’s highly successful 16 branch sale and leaseback programme in 2008, Marcus and Proactive Property Group were engaged to manage the sale and leaseback of Digital Arena’s commercial office premises.
What is a sale and leaseback
A sale and leaseback is a transaction where the owner-occupier sells its premises with a lease back to itself at an agreed rental rate and term.
The owner-occupier has the flexibility to determine lease terms suitable for its business requirements. However, the owner-occupier must balance this flexibility against investor considerations to maximise the sale price.
Lease structuring can drive significant value to the owner-occupier as a purchaser is investing not just in the property but also in the lease cash flows and the creditworthiness of the owner-occupier.
The leased property (provided the lease is well-structured) will often represent an attractive, stable, long-term investment for the purchaser.
Marcus worked with the Digital Arena director to determine its future lease requirements. Cashflows and end values were modelled to align outcome expectations.
Marcus then went to market sourcing agency proposals to market and transact the sale. After reviewing the proposals and interviewing the shortlisted agents, Matt Prentice and Janet Marshall from Collier’s North Shore office were appointed.
Marcus organised for:
- the commercial office premises to be measured and surveyed to define the leasable area
- the commercial office premises to be structurally surveyed to confirm the building’s 100% NBS seismic rating.
- Digital Arena’s solicitors to draft the deed of lease.
- the marketing Information Memorandum to include a detailed tenant biography so that potential purchasers could understand the tenant, its business, its client base and the fact that Covid and the corresponding lockdowns had not and were not impacting Digital Arena’s business.
The lease was structured so that:
- The terms met Digital Arena’s operational requirements.
- Management expenses were excluded from OPEX to eliminate future landlord’s charging costs to manage or pass on 3rd party management costs where there is no pricing tension.
- Detailed schedules of landlord fixtures and tenant chattels were drafted and incorporated into the lease to anticipate downstream market rent valuations, fixtures and building maintenance and premises reinstatement discussions.
- Tenant risk was mitigated.
- Rental cashflows were structured with guaranteed annual increases and market reviews to entice potential investors.
During the collation of the property records to populate the data room for purchaser due diligence, it was discovered that the commercial office fit-out had never been signed off by Council nor had a Code Compliance Certificate been issued.
Marcus engaged his designers to draw as-built floor plans for the office fit-out, organised for his fire engineer to assess fire egress and filed a building consent variation. The as-built floor plan was inspected, and a Code Compliance Certificate was issued.
The premises, lease and tenant were now ready to go to market.
The Client Outcome:
The premises were presented to the market in mid-October 2021 by Colliers on a 4-week marketing campaign. The intention was to close the marketing campaign in mid-November with a contract concluded by the end of November.
Within 2 weeks, we had identified our potential purchasers.
During the 3rd week of the marketing campaign, one of those potential purchasers presented a very favourable offer.
Marcus then worked with Matt Prentice of Colliers to improve the tabled purchase offer.
After discussions with Digital Arena’s director, the revised offer was accepted, and the property was sold unconditionally.
The outcome for Digital Arena was a sale at a yield of 5.11% for its commercial offices. This outcome exceeded expectations by 40 basis points and is probably a record for commercial offices in the locality.
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