§ 20A.05 Portfolio Transactions

• Jurisdiction: United States
• Publication year: 2022

§ 20A.05 Portfolio Transactions

[1]—Overview

Although many net lease sale-leaseback transactions involve only a single property, many others involve multiple separate properties. This in part reflects the role that net lease sale-leasebacks play as alternatives to financings, with many of the same motivations. Unlike occupancy or ground leases, sale-leaseback net leases do not reflect merely the agreement between a tenant seeking to rent real property to conduct some form of business or operations at a site and the owner attempting to generate financial returns. Rather they are part of a transaction that provides the seller-tenant with a way to monetize its real property equity while maintaining (with certain exceptions) its ability to conduct business or operate at the real property in a way similar to that of an owner. Thus, like in the mortgage financing market, entities with portfolios of real properties often seek to monetize entire portfolios in single transactions, with a single capital provider (i.e., buyer-landlord).

There are many reasons why portfolio transactions can benefit the parties involved. For buyer-landlords, portfolio net lease sale-leaseback transactions often allow a purchase at a lower purchase price (and higher capitalization rate¹ ) per site than individual net lease sale-leaseback transactions. This "buying in bulk" strategy can mean both a higher return on invested capital from rents paid under the leases and the ability to sell individual sites to individual buyers at higher purchase prices (and lower capitalization rates). Conversations that this author has had with certain net lease sale-leaseback providers (i.e., buyer-landlords) have indicated that many in the net lease sale-leaseback industry believe that as sophisticated property owners (i.e., potential seller-tenants) have become more aware of this potential pricing differential in recent years, the "wholesale to retail" purchase price and capitalization rate spreads between portfolio net lease sale-leaseback deals and individual sales of sites have narrowed. Although, because some seller-tenants require large amounts of capital relatively quickly and may lack the time or resources for a series of individual net lease sale-leaseback transactions (especially for very large portfolios), this author believes such spreads are likely to continue to be present in many circumstances, but perhaps not to the extent they once were. In addition, a portfolio net lease sale-leaseback transaction enables a buyer-landlord to deploy a large amount of capital relatively quickly, in one transaction, typically with significant savings in time and costs when compared with sourcing, negotiating, and closing separate net lease sale-leaseback transactions for the same number of individual sites.

As noted in the last paragraph, a portfolio deal enables the seller-tenant to monetize its equity in multiple properties relatively quickly, in one transaction, typically with significant savings in time and cost when compared with marketing, negotiating, and closing separate net lease sale-leaseback transactions for the same number of individual sites. This can be especially important when the proceeds of a net lease sale-leaseback are used for a specific purpose, such as to finance a merger transaction, where delays involved in attempting to separately monetize a portfolio of properties with different buyers might impede the larger process or cause it to fail.

Both buyer-landlords and seller-tenants can also benefit from an administrative perspective by having consistent terms applicable to multiple properties, rather than potentially different terms applicable to numerous different sites. Of course, consistently restrictive or disadvantageous terms are hardly a benefit, so the advantage of consistency always must be weighed against the substance of the applicable terms, which can vary widely from transaction to transaction.

Also, a buyer-landlord utilizing a master lease structure in a portfolio net lease sale-leaseback transaction can utilize it to attempt to limit a seller-tenant's flexibility in a later seller-tenant bankruptcy proceeding.²

[2]—Individual Leases vs. Master Leases³

One critical question at the outset of any negotiation of a portfolio net lease sale-leaseback transaction is whether each site will be subject to a separate lease or the sites will be covered by one so-called "master lease."⁴ The answer can have important implications for the terms of the transaction and the parties' potential rights and remedies in a default scenario, especially if the seller-tenant files for bankruptcy protection.

[3]—Specific Portfolio Lease Issues

[a]—Terms and Extensions

Multiple properties demised under one lease are often subject to the same lease term, with extension rights on an "all or none" basis—that is, the seller-tenant may either extend the term for all sites or not, but may not select some while excluding others. Although the "all or none" approach has distinct advantages for the buyer-landlord,⁵ it is often deemed too restrictive by a seller-tenant under a long-term sale-leaseback net lease, especially where the transaction involves a large number of the seller-tenant's operating sites. Therefore, some seller-tenants insist on having the right to determine, within negotiated parameters, which sites they may elect to "drop" from the lease—i.e., sites that the seller-tenant can choose not to extend under the lease at the expiration of the initial term or under previous extension terms. However, allowing such flexibility in extension rights creates certain issues...