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Real estate deals in Scotland are up but there are complex motives behind the sales and leases
In 2012, many commentators retained a jaundiced view of property but that is not what we are seeing now. During 2013, and particularly since the summer, pedigree property players are raising the senior debt and equity necessary to refinance property at written down values or buy out their loans at a discount.
The deals are less about the content of the title deeds and more about the structuring to secure Business Premises Renovation Allowance (as an example) or, in the case of loan buy-outs, avoiding tax charges on debt write-offs. Tax advice, steps plans and HMRC clearance have become standard ingredients in our deals.
Those deals are increasingly finding favour with senior debt funders and equity players who see attractive returns, and there is a greater pool to choose from. The deleveraging by Bank of Scotland and the Royal Bank of Scotland of their property books has led to other new market entrants, HSBC and Barclays in particular but also private property funds such as ICG Longbow and Castle Capital.
Gone are the days of the simple bi-lateral facility letter, standard security and valuation to support the property deals. Share pledges, cross guarantees, full subordination, joint insurance for lender/borrower and consents from shareholders to the full suite of securities are now sine qua nons for lenders. Anything above £10m senior debt gets the full Loan Market Association facility treatment. Banks have learned their lesson. On default, loans, securities or shares in the borrower, companies can be sold in a heartbeat.
We have also seen a marked increase in the number of sale and leaseback deals in Scotland, particularly in leisure, using long leases to plug equity gaps. If Propco can buy a let investment (occupied by Tradeco) for £10m with £6.5m senior debt and £2m cash, Propco can plug the £1.5m gap by selling the freehold of the building to Fundco; Fundco will pay the £1.5m as a reverse premium if Propco signs a 125-year-long lease on a moderate rent with guaranteed uplifts (collared and capped). Propco still collects the rent from Tradeco and then pays a small proportion of it to cover what’s due to Fundco, like an extra local authority rates bill. The 125-year leasehold interest is treated as akin to ownership and can be secured to a bank in exchange for the £6.5m.
Of course, modelling is required on the figures for the lease life but it’s an innovative way of splitting a property asset to realise more cash up front with no stamp duty land tax payable on the leaseback.
As for leasing, more high street multiples and landlords from the retail and industrial sectors are using tenders to achieve a fixed-price menu for lease management work. Few leases now have a rent review clause worth arguing about and often tenant insolvency presents a greater risk than a repair covenant.
With RICS-style leases gaining traction, leasing looks to be heading down the commodity track and full-service law firms need the lawyers, paralegals and systems to cover everything from rocket science to rent review memo.