Considering Alternative Solutions

The world after COVID is not the same and will not likely return to what it was.  The place businesses will run their operations out of is one of the more challenging questions they are facing. 

Both property owner and tenant are looking for flexibility and terms they can live with over the next 5 years. 

We recently advised on a transaction where a distribution company was looking to acquire their own building.  One that was large enough to allow them to expand as a local distribution centre offering same day and next day deliveries for on-line retail clients. 

Debt servicing was not a problem as the client’s revenues were actually increasing with the new distribution centre strategy. However, the company did not yet have the equity base to secure a mortgage for the size of property they were looking for.    

Rather than purchase a smaller building and go through a property sale and yet another disruptive move in a few years, the decision was made to find a tenant to rent out part of the space in the short term (2 to 3 years). 

The rent would add even more debt servicing capacity for the mortgage but did nothing to improve the lack of equity in the prospective new owner. 

Our solution – offer the rent at a reduced rate in return for having the tenant utilize its equity by way of a guarantee that could be added to the buyer’s own equity position. 

The tenant, a small manufacturer looking for additional inventory storage space was able to get a far more flexible lease, at better rental terms, simply by using its idle equity to generate a rental benefit that improved its own net profits.  

The transaction was a win-win for both sides because they were willing to look at something new, at a time where it’s too important not to at least consider alternatives. 

The same structure and security positions created for this transaction can be used for retail, commercial or office transactions.