Volatile Economy Changes Building, Land Financing Options for Growing Banks, Says CEO of Horn Capital Realty

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Jonathan S. Horn, CEO of Horn Capital Realty, Inc. of Miami, details the advantages to growing banks of utilizing sale-leaseback financing and build-to-suit programs as attractive alternatives for maintaining their new facilities expansions in an unsettled economy that may remain volatile for some time. The veteran of more than $600 million worth of such deals contends the banks can remain competitive, conserve capital, avoid delays that bring on higher property and construction costs, reduce overhead and improve profitability.

Ground leases also are proving highly attractive to banks and credit unions

Sale-leaseback financing and build-to-suit programs are regaining traction as attractive alternatives for banks intent on adding new facilities, contends Jonathan S. Horn. "In an unsettled economy exhibiting a tendency for prolonged volatility, it offers multiple benefits," says the 17-year veteran of commercial property work.

Today's banks - those with a competitive fire and an abiding desire to dominate a market by expanding their bricks-and-mortar presence - are facing daunting obstacles, notes Horn, CEO of Horn Capital Realty of Miami. "Higher property prices and rising construction costs make financial institutions reluctant to expend their own capital resources for new branches and offices."

Horn, one of the foremost experts in triple-net leases (NNN), sale-leaseback financing and 1031 property deals, says bankers are under additional pressure from directors and shareholders to conserve capital, to reduce overhead, to improve profitability and to keep both them and the regulators happy.

"That has created new tensions within ranks of executives accustomed to consistent growth and expansion," said Horn who has completed more than $600 million in transactions with such large national firms as Home Depot, Kmart, RBC Centura, Taco Bell, Wal-Mart, Walgreen Drug Stores and Wild Oats Markets (now Whole Foods), et al.

"Then there's the mortgage mess hangover and the current credit crunch. In fact, the unpredictable economy, roiling with job cuts, lay-offs and price spikes in gas, oil, food and just about all other essentials, has stopped development plans in a lot of industries beyond the banking sector."

A return to such long-time, proven financing options as sale-leaseback financing and build-to-suit development -- separately or in combination -- may well be the answer for banks set on continuing their growth and positioning their operations for long-term success in an impulsive marketplace, according to the commercial broker.

"In the past two decades, the sale-leaseback industry has restructured the ownership of trillions of dollars worth of the nation's corporate real estate assets," Horn emphasized. "Sale-leaseback financing is becoming increasingly popular as C-suite executives seek critical funds to grow their companies despite uneasy debt markets.

"And since all forms of build-to-suit development transfer both the economic and construction risks to the developer while freeing up a tenant's capital, this solution also is enjoying a resurgence.," he observed.

Sale-Leaseback Practices

In a sale-leaseback arrangement, a company sells one or more of its existing owner-occupied properties to a non-related third party investor, generally for fair market value, in order to convert its illiquid real estate assets into working capital.

The investor provides the seller with a triple-net lease for a negotiated period of 10 to 25 years plus options. The seller/tenant then pays the investor a negotiated annual rent equal to 7% to 10% of the contracted sale price. That rental rate is typically credit-driven.

A properly structured sale-leaseback transaction with an operating lease not only reduces expenses, but converts the seller/tenant's illiquid real estate assets to capital, Horn explained. Such deals can provide the seller/tenant company with the following business advantages:

  • 100% financing based on the appraised value of the property;
  • Operating leases that do not appear on the tenant's balance sheet as debt or as a long-term lease obligation;
  • Full control of the tenant's real estate under lease provisions;
  • Tax deductible lease payments; and
  • Cash realized from the sale-leaseback transactions that can be used to enhance liquidity, expand operations, acquire other businesses, reduce debt or defer capital gains by 1031 exchange, etc.

Horn, who founded his firm in 1996 in Dallas, earned a B.A. in economics from the University of Texas at Austin, and has been quoted in or had authored articles appear in Banker & Tradesman, Real Estate Issues, Area Development, Office & Industrial Properties, Austin, Dallas and San Antonio Business Journals, Pittsburgh Business Times and by the Dow Jones News Wire.

"In a build-to-suit program, a third party developer works closely with the bank's representative to find an appropriate location(s)," he stated. "Once a long-term triple net lease (NNN) is signed with the developer, the developer purchases the land and builds the facility. Upon completion, the tenant occupies the property and begins monthly rental payment."

In cases where the bank is concerned about the developer adding "soft costs", it may choose to control development by doing the land acquisitions, construction, etc. itself, and upon completion, sell the property to the developer at a mutually agreeable cap rate, he said. (Cap rate is annual rent divided by the total construction and land cost). Such an arrangement is called a reverse build-to-suit.

"Ground leases also are proving highly attractive to banks and credit unions," added the Miami-based broker.

Such leases enable the tenant to own its facility while paying a lower rent based on the land price alone. In either scenario, the bank can use its funds to focus on day-to-day operations - more aggressive marketing, workforce expansion, enhanced customer services and products -- rather than fully tying up valuable capital in real estate.

"Bank managements do not need to abandon their growth plans entirely," Horn argues. "Whether the economic seas are calm or turbulent, the advantages of sale-leaseback and build-to-suit programs can help them sail confidently toward their chosen destinations."

For a Fact Sheet, answers to Frequently Asked Questions (FAQs), a Horn photo and profile, visit the Web site http://www.horncapital.com

Jonathan S. Horn, President, Horn Capital Realty, Inc., Miami, 305-864-2000; fax 864-4240; http://www.horncapital.com
or Preston F. Kirk, APR, Kirk Public Relations, Austin, Texas, 830-693-4447


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