As real estate owners struggle with the impact of the coronavirus disease 2019 (COVID-19) pandemic on earnings and liquidity, here are some strategies to extract much-needed capital from owned real estate.
Take my air rights – please
Depending on a property's location, the owner may sell so-called "TDRs" or transferable development or air rights appurtenant to the subject property for a tidy profit. New York City and Downtown Los Angeles are two such jurisdictions that permit the sale of TDRs. Prices can vary from 50% to more than 100% of the land value (per square foot) to which the TDRs will attach.
You can have your cake and eat it too, sort of
A sale-leaseback transaction enables a property owner to monetize its real estate while retaining occupancy and control of the asset under a long-term lease. Owners may structure sale-leasebacks in many ways, depending on their objectives.
- In a traditional sale-leaseback, the owner sells the property (comprised of the land and improvements) to a third-party, securing much-needed capital, and leases it back.
- An alternative to the traditional sale-leaseback, the owner sells the land (instead of the entire property) to a third-party while retaining ownership of the improvements and leases the land back.
- Another type of sale-leaseback is the prepaid leaseback. The owner leases the property to a third-party in exchange for a one-time lump sum payment at lease inception. The original owner then leases the property back for recurring payments over the lease term.
- One more variant of a sale-leaseback is the contribution leaseback. The owner contributes the property into a partnership structure and then leases it back. In exchange for the contributed real estate, the original owner receives limited partnership interests (referred to as operating partnership units) that may convert to cash or REIT shares.
When is the sum greater than the whole?
In real estate, of course.
Think of a high-rise apartment building with ground-floor retail space leased to a credit tenant. By dividing the building into two legal parcels via vertical subdivision or condominium – one retail and the other residential – the owner may spin off the retail parcel for a premium and retain the residential portion, or it may finance one or both parcels separately on more favorable terms.
"First the doctor told me the good news: I was going to have a disease named after me." – Steve Martin
There are many ways for a hospital/healthcare facility to unlock value in its real estate portfolio.
It may contribute non-core real estate, such as a parking structure, to a joint venture with an experienced operator. The facility receives immediate capital to invest in mission-critical items and offloads property management responsibilities onto an experienced third-party owner/operator.
Another example involves the housing of data. Instead of keeping critical data onsite, the hospital/healthcare facility may move such data offsite to a third-party data service provider, thus freeing real estate to unlock needed capital.
- Seek traditional debt or equity solutions
- Repurpose, sell or lease unused real estate
- License rooftop space for solar or cellular use
- Sell access to real estate to billboard and sign companies for advertising
Please note that each of the approaches mentioned above involves legal, tax, accounting, and other considerations.