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TI/Cap Ex Financing

Historically, TI’s/Cap Ex have been funded by landlords, tenants, or in many instances, a combination of both. In addition to not being properly capitalized for this ancillary activity, landlords often fund out of necessity.

During lease negotiations, tenants generally will accept as many TI dollars as landlords can offer. This is a form of off-balance-sheet financing; however, it does not do what off-balance-sheet financing is designed to do, which is deliver money to lessees at their cost of funds. But it’s a dubious form of off-balance-sheet financing because it is priced not according to the tenants’ corporate credit, but rather at the landlords’ nonrecourse mortgage borrowing rate plus a return. Therefore, the effective interest rates landlords charge even the most creditworthy tenants are at a premium to the rates typically obtained by such tenants in their borrowing transactions.

For tenants that self-fund their TI requirements, the immediate negative impact is on their financial statements. The TI investments are reflected on the balance sheet as ownership of a long-term, non-revenue producing asset with a corresponding increase in liabilities or cash reduction.In some instances, due to the imprudence of borrowing high-cost TI dollars from landlords, tenants must self-finance a portion of the total TI dollars required to fully build out their space. Ironically, after having spent considerable time and effort analyzing the lease versus own decision, tenants that decide to lease still are forced to take cash off the balance sheet and replace that cash with TI assets – in effect owning real property in space they are leasing.

Our Alternative
If borrowing money from landlords is expensive and/or not fully sufficient and self-funding has its own list of drawbacks, what other alternatives do tenants have? While every tenant-landlord negotiation has its own unique dynamic, these general characteristics might improve the situation from the tenant’s perspective:

  • Receive off-balance sheet financing from the landlord for 100% of TIs;
  • Remove nonrevenue producing TI’s from the balance sheet and re-deploy that equity back into the core business; and
  • Receive the full benefit of your corporate credit.

Advantages
There are several economic benefits. First, depending on creditworthiness, this financing is less costly than if the tenant funded its TI’s with 100 percent debt. This is achieved through the acceleration of tax benefits from an on-balance-sheet 39-year recovery period to recover the investment over the lease term. In effect, the tenant is able to expense the principal portion of the loan since it is considered rent and is fully deductible.

Second, removing an unwanted asset from the balance sheet and subsequently freeing up equity that was required to support that asset is a clear advantage. Consequently, that equity can be borrowed and reinvested back into core business operations, creating significant additional qualitative benefits.

Finally, assuming freed-up equity can be reinvested; there are direct positive impacts on the profit and loss statement and lower operating expenses. For tenants with healthy cash balances, at the very least this enables them to consider the option of purchasing their own corporate paper, and therefore having easily convertible liquidity whenever needed. In effect, this is swapping the TI net book value, a non-earning asset, into a corporate security.Ultimately, we provide an easy conduit for sale-leaseback of TI assets owned by Tenants and/or Landlords, resulting in a material increase in property values and savings to both Tenant and Landlords.

Quick Close
There are times where a transaction must close in a very tight time frame. There may be an opportunity to create substantial value for certainty of close. We have relationships with public and private sources of capital that can close quickly. Pricing varies depending on capital source and transaction specifics.

Need our Help?

Richard Scandaliato
richard@rkmcap.com

Patrick
patrick@rkmcap.com

Kathy
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