Sale Leaseback & Mortgage
Content
Sale and Leaseback, Mortgage
Presented by :
Ankush Dhingra Infra -03 Ishan Sharma Infra -07 Rajinder Kumar Infra - 17
Agenda
•What is Lease? •Terms used in Lease •Lease according to Transfer of property act, 1882 •Rights and liabilities of Lessor & Lessee •Sale and Leaseback •Possible Benefits of Sale Leaseback Funding •Questionable Sale Leaseback Candidates •Example •Mortgage •Types of Mortgage •Right to Redeem and suit of redemption •Situations & Steps when the mortgage can exercise • •
What is Lease?
Lease is a contractual arrangement under which the owner of an asset (lessor) allows the use of the asset to the user (lessee) for an agreed period of time (lease period) in consideration for the periodic payment (lease rent). At the end of the lease period, the asset reverts back to the owner, unless there is a provision for the renewal of the lease contract.
Terms Used
Lessor, Lessee, Premium and Rent
The transferor is called the lessor, the transferee is called the lessee, the price is called the premium and the money, share, service or other thing to be so rendered is called the rent.
ACC. TO TRANSFER OF PROPERTY ACT, 1882
A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent (Section 105).
ACC. TO TRANSFER OF PROPERTY ACT, 1882 CONTD.
A lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year, terminable, on the part of either lessor or lessee, by six months’ notice and a lease of immovable property for any other purpose shall be deemed to be a lease from month to month, terminable, on the part of either lessor or lessee, by fifteen days’ notice. A lease of immovable property from year to year, or for any term exceeding one year or reserving a yearly rent, can be made only by a registered instrument. All other leases of immovable property may be made either by a registered instrument or by oral agreement accompanied by delivery of possession.
Rights and liabilities of the Lessor
1.The lessor is bound to disclose to the lessee any material defect in the property; 2. 3.The lessor is bound on the lessee’s request to put him in possession of the property; 4. 5.If the lessee pays the rent and performs the contracts binding on the lessee, he may hold the property during the time limited by the lease without interruption.
Rights and liabilities of the Lessee
1.Any material part of the property destroyed and permanently unfit for the purposes for which it was let by fire, or flood, or violence of an army or of a mob, the lease shall, at the option of the lessee, be void: 2.If the lessor neglects to make, within a reasonable time after notice, any repairs which he is bound to make to the property, the lessee may make the same himself, and deduct the expense of such repairs with interest from the rent, or otherwise recover it from the lessor; 3.Bound to pay, the premium or rent to the lessor or his agent in this behalf; 4.May remove, at any time while he is in possession of the property leased all things which he has attached to the earth provided he leaves the property in the state in which he received it; 5.Must not, without the lessor’s consent, erect on the property any permanent structure, except for agricultural purposes;
Sale and Leaseback
Definition Leaseback, short for sale-and-leaseback, is a financial transaction, where one sells an asset and leases it back for a long-term: thus one continues to be able to use the asset, but no longer owns it.
A
sale-and-leaseback is typically a commercial real estate transaction in which one party, often a corporation, sells its corporate real estate assets to another party, such as an institutional investor, or a real estate investment trust (riet) , and then leases the property back at a rental rate and lease term that is acceptable to the new investor/landlord. In a sale-and-leaseback, the lease term and rental rate is based on the new investor/landlord's financing costs, the seller/lessee credit rating, and a market rate of return based on the initial cash
Sale and Leaseback Contd.
Sale and Leaseback Contd.
The reasons and advantages for doing a sale-and-leaseback by a seller/lessee are varied, but the most common are : • •Help finance expansion of the existing business, purchase new plant equipment, or invest in new business opportunities. •Help pay down debt and improve the company's balance sheet. •Help reduce the seller/lessee's business income tax liability caused by the appreciation in value (land only) of its corporate real estate assets. In addition, the seller/lessee as a tenant can deduct all rent payments as a legitimate business expense on its annual tax returns. •Tax benefits are realised by offsetting lease costs as an operating expense. •
Possible Benefits of Sale Leaseback Funding
Accretion:
A sale-leaseback transaction maybe mildly accretive for the business in the near term. As a Funding Source, Leaseback financing (Lease) usually has less reporting & operating restrictions than bank debt. In troubled times a real estate investor maybe easier to work with than a bank.
Questionable Sale Leaseback Candidates
Real Estate that would be a Challenging Investment regardless of the Tenant:
Environmental Issues Title Issues In Need of Significant Capital Improvements to Remain
Serviceable Easements Need to be Renegotiated Businesses with Volatile Revenue & Cash Flow Businesses with Variable & Large Maintenance Requirements Businesses with Large Working Capital or Seasonal Working Capital Needs Businesses that have Employed Too Much Leverage Businesses that are Not Well Run/Run to the Detriment of Other Stakeholders Businesses in Industries/Markets that are Undergoing Significant Changes
Using property for cash
The insatiable need for capital for many companies, whether for organic growth or growth by acquisition, has brought the sale and leaseback of commercial real estate well and truly back into the spotlight as a practical and increasingly popular corporate finance tool. -Sale and leaseback takes the spotlight, REPORT BY KPMG
Example - IBM
IBM in late 2005 started the long-term pruning of its owned property book with the sale and leaseback of four of its five remaining owned sites in the UK: North Harbour in Portsmouth, Warwick, Greenford and Greenock, in Scotland. After the completion of this transaction at the end of the year, it now has just one owned site left in the UK, its Hursley software laboratory. “There are three principal driving forces behind the policy,” explains Nick Goude, Regional Consultancy Services Manager of IBM Real Estate.
“One, it’s a way of divesting surplus capacity. We didn’t do
100 percent leaseback, so it’s a major resizing of the portfolio. Two, it reduces the operating costs of the business going forward. Three, we can book cash and profit up front and that cash reinvested in the business is put to better use than if it were still in property.”
Mortgage
Mortgage:As per Section 58 of Transfer of Property Act
Mortgage means:
Mortgage is a transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement, which may give rise to a pecuniary liability.
Mortgagor
The person borrowing and transferring his
interest in an immovable property to the lender is the mortgagor.
Mortgagee
The lender is the mortgagee.
Mortgage Money: The funds lent against which the property is used as security is the mortgage money.
Mortgage-deed:The instrument by which the transfer is effected is called a mortgage-deed.
Types of Mortgages
Simple mortgage:mortgaged property, the mortgagor binds himself personally to pay the mortgagemoney, and agrees, expressly or impliedly, that in the event of his failing to pay according to his contract, the Mortgagee shall have a right to cause the mortgaged property to be sold for satisfaction of the mortgaged debt.
Without delivering possession of the
Conditional mortgage:mortgaged property on condition that on default of payment of mortgage money on a certain date, the sale shall become absolute or on condition that on such payment being made the sale shall become void or on condition that on such payment being made the buyer shall transfer the property to the seller.
The mortgagor presumably sells the
Usufructuary mortgage:The mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee and authorizes him to retain such possession until payment of the mortgage-money. The mortgagee is allowed to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest or in payment of the mortgage money, or partly in lieu of interest or partly in payment of the mortgage money.
English mortgage:The mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a provision that he will re-transfer it to the mortgager upon payment of the mortgagemoney as agreed.
FIXED RATE MORTGAGE A fixed rate mortgage is a mortgage in which the interest rate remains the same over the life of the loan. This type of mortgage is often viewed as the most low-risk allows people to make better budgeting decisions protect borrowers from increases in interest rates
Right to redeem and suit of redemption
After making the entire payment of the loan
amount, the mortgagor has a right to require the Mortgagee to deliver the mortgage deed and other title deeds and if the Mortgagee is in possession of the mortgaged property, to deliver possession thereof either to back to the mortgagor or such third person as he may direct. Such a right is called right to redeem and a suit to enforce is called a suit of redemption.
mortgagee can exercise the right to sell the property
A mortgagee can exercise his power to sell the mortgaged property, in default of payment of the mortgage-money without the intervention of the court in the following cases: Where the mortgage is an English mortgage Where a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage deed and the mortgagee is the government. Where a power of sale without the intervention of the court is expressly conferred upon the mortgagee by the mortgage deed and the mortgaged property is situated within the town which the State Government may, by
mortgagee can exercise right to sell the property
The mortgagee has served a notice in writing
requiring payment of the principal money to the mortgagor, or one of the several mortgagors, and default has been made in payment of the principal money, or of part thereof, for three months after such service; or Some interest under the mortgage amounting at least to five hundred rupees is in arrears and unpaid for three months after becoming due.
MORTGAGE BROKER
Often, people confuse mortgage brokers with
lenders. mortgage broker is a loan provider who serves as a liaison between borrowers and lenders. a mortgage broker will provide basic credit counseling in an attempt to assist borrowers with correcting credit issues. Brokers answer questions and assist borrowers in understanding both the application process and loan details as well.
Some of the well-known mortgage-financing companies offering various types of mortgage in India are as follows – LIC Housing Finance HDFC ICICI Home Finance SBI Housing Finance UCO Bank State Bank of India State Bank of Mysore Allahabad Bank United Bank of India United Commercial Bank of India Bank of Baroda Kotak Mahindra Bank Citi Bank HSBC Standard Chartered Bank
Presented by :
Ankush Dhingra Infra -03 Ishan Sharma Infra -07 Rajinder Kumar Infra - 17
Agenda
•What is Lease? •Terms used in Lease •Lease according to Transfer of property act, 1882 •Rights and liabilities of Lessor & Lessee •Sale and Leaseback •Possible Benefits of Sale Leaseback Funding •Questionable Sale Leaseback Candidates •Example •Mortgage •Types of Mortgage •Right to Redeem and suit of redemption •Situations & Steps when the mortgage can exercise • •
What is Lease?
Lease is a contractual arrangement under which the owner of an asset (lessor) allows the use of the asset to the user (lessee) for an agreed period of time (lease period) in consideration for the periodic payment (lease rent). At the end of the lease period, the asset reverts back to the owner, unless there is a provision for the renewal of the lease contract.
Terms Used
Lessor, Lessee, Premium and Rent
The transferor is called the lessor, the transferee is called the lessee, the price is called the premium and the money, share, service or other thing to be so rendered is called the rent.
ACC. TO TRANSFER OF PROPERTY ACT, 1882
A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent (Section 105).
ACC. TO TRANSFER OF PROPERTY ACT, 1882 CONTD.
A lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year, terminable, on the part of either lessor or lessee, by six months’ notice and a lease of immovable property for any other purpose shall be deemed to be a lease from month to month, terminable, on the part of either lessor or lessee, by fifteen days’ notice. A lease of immovable property from year to year, or for any term exceeding one year or reserving a yearly rent, can be made only by a registered instrument. All other leases of immovable property may be made either by a registered instrument or by oral agreement accompanied by delivery of possession.
Rights and liabilities of the Lessor
1.The lessor is bound to disclose to the lessee any material defect in the property; 2. 3.The lessor is bound on the lessee’s request to put him in possession of the property; 4. 5.If the lessee pays the rent and performs the contracts binding on the lessee, he may hold the property during the time limited by the lease without interruption.
Rights and liabilities of the Lessee
1.Any material part of the property destroyed and permanently unfit for the purposes for which it was let by fire, or flood, or violence of an army or of a mob, the lease shall, at the option of the lessee, be void: 2.If the lessor neglects to make, within a reasonable time after notice, any repairs which he is bound to make to the property, the lessee may make the same himself, and deduct the expense of such repairs with interest from the rent, or otherwise recover it from the lessor; 3.Bound to pay, the premium or rent to the lessor or his agent in this behalf; 4.May remove, at any time while he is in possession of the property leased all things which he has attached to the earth provided he leaves the property in the state in which he received it; 5.Must not, without the lessor’s consent, erect on the property any permanent structure, except for agricultural purposes;
Sale and Leaseback
Definition Leaseback, short for sale-and-leaseback, is a financial transaction, where one sells an asset and leases it back for a long-term: thus one continues to be able to use the asset, but no longer owns it.
A
sale-and-leaseback is typically a commercial real estate transaction in which one party, often a corporation, sells its corporate real estate assets to another party, such as an institutional investor, or a real estate investment trust (riet) , and then leases the property back at a rental rate and lease term that is acceptable to the new investor/landlord. In a sale-and-leaseback, the lease term and rental rate is based on the new investor/landlord's financing costs, the seller/lessee credit rating, and a market rate of return based on the initial cash
Sale and Leaseback Contd.
Sale and Leaseback Contd.
The reasons and advantages for doing a sale-and-leaseback by a seller/lessee are varied, but the most common are : • •Help finance expansion of the existing business, purchase new plant equipment, or invest in new business opportunities. •Help pay down debt and improve the company's balance sheet. •Help reduce the seller/lessee's business income tax liability caused by the appreciation in value (land only) of its corporate real estate assets. In addition, the seller/lessee as a tenant can deduct all rent payments as a legitimate business expense on its annual tax returns. •Tax benefits are realised by offsetting lease costs as an operating expense. •
Possible Benefits of Sale Leaseback Funding
Accretion:
A sale-leaseback transaction maybe mildly accretive for the business in the near term. As a Funding Source, Leaseback financing (Lease) usually has less reporting & operating restrictions than bank debt. In troubled times a real estate investor maybe easier to work with than a bank.
Questionable Sale Leaseback Candidates
Real Estate that would be a Challenging Investment regardless of the Tenant:
Environmental Issues Title Issues In Need of Significant Capital Improvements to Remain
Serviceable Easements Need to be Renegotiated Businesses with Volatile Revenue & Cash Flow Businesses with Variable & Large Maintenance Requirements Businesses with Large Working Capital or Seasonal Working Capital Needs Businesses that have Employed Too Much Leverage Businesses that are Not Well Run/Run to the Detriment of Other Stakeholders Businesses in Industries/Markets that are Undergoing Significant Changes
Using property for cash
The insatiable need for capital for many companies, whether for organic growth or growth by acquisition, has brought the sale and leaseback of commercial real estate well and truly back into the spotlight as a practical and increasingly popular corporate finance tool. -Sale and leaseback takes the spotlight, REPORT BY KPMG
Example - IBM
IBM in late 2005 started the long-term pruning of its owned property book with the sale and leaseback of four of its five remaining owned sites in the UK: North Harbour in Portsmouth, Warwick, Greenford and Greenock, in Scotland. After the completion of this transaction at the end of the year, it now has just one owned site left in the UK, its Hursley software laboratory. “There are three principal driving forces behind the policy,” explains Nick Goude, Regional Consultancy Services Manager of IBM Real Estate.
“One, it’s a way of divesting surplus capacity. We didn’t do
100 percent leaseback, so it’s a major resizing of the portfolio. Two, it reduces the operating costs of the business going forward. Three, we can book cash and profit up front and that cash reinvested in the business is put to better use than if it were still in property.”
Mortgage
Mortgage:As per Section 58 of Transfer of Property Act
Mortgage means:
Mortgage is a transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement, which may give rise to a pecuniary liability.
Mortgagor
The person borrowing and transferring his
interest in an immovable property to the lender is the mortgagor.
Mortgagee
The lender is the mortgagee.
Mortgage Money: The funds lent against which the property is used as security is the mortgage money.
Mortgage-deed:The instrument by which the transfer is effected is called a mortgage-deed.
Types of Mortgages
Simple mortgage:mortgaged property, the mortgagor binds himself personally to pay the mortgagemoney, and agrees, expressly or impliedly, that in the event of his failing to pay according to his contract, the Mortgagee shall have a right to cause the mortgaged property to be sold for satisfaction of the mortgaged debt.
Without delivering possession of the
Conditional mortgage:mortgaged property on condition that on default of payment of mortgage money on a certain date, the sale shall become absolute or on condition that on such payment being made the sale shall become void or on condition that on such payment being made the buyer shall transfer the property to the seller.
The mortgagor presumably sells the
Usufructuary mortgage:The mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee and authorizes him to retain such possession until payment of the mortgage-money. The mortgagee is allowed to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest or in payment of the mortgage money, or partly in lieu of interest or partly in payment of the mortgage money.
English mortgage:The mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a provision that he will re-transfer it to the mortgager upon payment of the mortgagemoney as agreed.
FIXED RATE MORTGAGE A fixed rate mortgage is a mortgage in which the interest rate remains the same over the life of the loan. This type of mortgage is often viewed as the most low-risk allows people to make better budgeting decisions protect borrowers from increases in interest rates
Right to redeem and suit of redemption
After making the entire payment of the loan
amount, the mortgagor has a right to require the Mortgagee to deliver the mortgage deed and other title deeds and if the Mortgagee is in possession of the mortgaged property, to deliver possession thereof either to back to the mortgagor or such third person as he may direct. Such a right is called right to redeem and a suit to enforce is called a suit of redemption.
mortgagee can exercise the right to sell the property
A mortgagee can exercise his power to sell the mortgaged property, in default of payment of the mortgage-money without the intervention of the court in the following cases: Where the mortgage is an English mortgage Where a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage deed and the mortgagee is the government. Where a power of sale without the intervention of the court is expressly conferred upon the mortgagee by the mortgage deed and the mortgaged property is situated within the town which the State Government may, by
mortgagee can exercise right to sell the property
The mortgagee has served a notice in writing
requiring payment of the principal money to the mortgagor, or one of the several mortgagors, and default has been made in payment of the principal money, or of part thereof, for three months after such service; or Some interest under the mortgage amounting at least to five hundred rupees is in arrears and unpaid for three months after becoming due.
MORTGAGE BROKER
Often, people confuse mortgage brokers with
lenders. mortgage broker is a loan provider who serves as a liaison between borrowers and lenders. a mortgage broker will provide basic credit counseling in an attempt to assist borrowers with correcting credit issues. Brokers answer questions and assist borrowers in understanding both the application process and loan details as well.
Some of the well-known mortgage-financing companies offering various types of mortgage in India are as follows – LIC Housing Finance HDFC ICICI Home Finance SBI Housing Finance UCO Bank State Bank of India State Bank of Mysore Allahabad Bank United Bank of India United Commercial Bank of India Bank of Baroda Kotak Mahindra Bank Citi Bank HSBC Standard Chartered Bank
