Since every business will be impacted by the COVID-19 pandemic differently, businesses have to explore other options available and property owners are not left out.
We found that owner-occupiers have several options to gain substantial access to cash by leveraging the value of their property outside of an outright sale. Here are four potential scenarios that owner-occupiers might explore, depending on their unique situation:
1. Refinance Your Mortgage to Access Equity
If it has been a few years since you purchased or refinanced your property, refinancing your property could be a great way to pull cash out of your property. While lenders have tightened up their credit requirements due to the current environment, banks are still refinancing properties to allow owners to pull cash out of their property through loan proceeds. When banks determine the loan amount they will lend against a property, the amount is calculated based on a formula called Loan-to-Value. Historically, local banks will lend an amount up to 65% loan-to-value for improved properties.
For owner-occupiers, this means that if your property is valued at N1,000,000, you could receive a loan from a bank for N650,000. If your existing mortgage is less than N650,000, you could access the equity you’ve built in the property and pull cash out equal to the amount of your new mortgage minus your existing mortgage.
This could be an attractive option for companies who think they will need more liquidity than what the government subsidies are offering and whose current mortgage balance is less than 50% of the market value of the property. Different types of lenders will offer different loan values to owner-occupiers, so it’s important to talk to your broker about the different financing vehicles that may be available to you.
In a sale-leaseback, the owner sells the property to a buyer and simultaneously signs a lease to occupy the property and pay rent for a predetermined amount of time. The lease term can be as short as six months, to ensure you have enough time to move locations, or as long as 10+ years if you want to stay in your existing building for the long term. Unlike an outright sale, the sales price for a sale-leaseback is dependent on more factors than just the market value. Rent payments are typically determined based on a yield (percentage return, or cap rate) of the purchase price required by the buyer.
This is a good option if an owner-occupier would like to cash out on all of the equity they have built in the property like they would in an outright sale of the property but needs to remain in the location to maintain the operations of the business for a given time. The lease length and the rent the seller will be paying are important factors that will impact the proceeds available to the seller, so be sure to consult with your broker to determine the best way to structure the transaction to achieve your goals.
3. Ground Lease
In a ground lease transaction, the owner-occupier sells the land underneath the building while maintaining ownership of the building, all improvements on the property and any future development rights.
Similar to a sale-leaseback, simultaneously with the sale of the land the seller signs a ground lease to occupy the land and pay ground rent for a predetermined amount of time. Unlike a sale-leaseback, however, the lease term in a ground lease can range from 25 years to 99+ years. At the end of the ground lease, the parties either work out an extension or the original seller turns over the building to the ground leaseholder.
It’s not uncommon for the occupier to have a purchase option or multiple extension options at the end of the ground lease term to preserve the company’s rights to remain in the building for the long term. This structure might sound unusual, but some investors view a ground lease as a low-risk way to receive long-term annual cash flow.
This could be a good option if you are confident you will be staying in your building for the long term and want more control of your occupancy at the property into the future or if you want to preserve the option to develop additional improvements on the property as you please.
Depending on the property, the land value can range from 30% to 60% of the total value of the property, so the cash proceeds you can pull out from this option will be less than in a sale-leaseback. However, the ground rent payments are also lower than they would be in a sale-leaseback because you are only “renting” the land, not the building, and investors typically require lower yields than they would in a sale-leaseback.
4. Lease Unused Space
If you have some extra space in your property and could use some help offsetting the operating costs of your building, you could lease out some space to another business that is looking for space. This allows you to create an additional revenue stream to help cover your business expenses.
As we have laid out, there are various options for property owners to leverage their real estate during this uncertain time. If you have questions about any of these options or would like to discuss your company’s unique situation, please schedule a consultation with one of our investment services brokers.