How Savvy Dealmakers Uses Real Estate to Finance Acquisitions
Savvy Dealmakers are increasingly leveraging commercial real estate strategies to finance acquisitions in the logistics, car washes and warehousing sector. This technique involves separating the business operations (operating company, or OpCo) from the underlying real estate assets (property company, or PropCo).
Example:
Savvy investor open escrow to acquire a regional logistics company with a network of 30 warehouses for a total price of $120 million:
* $60 million: Allocated to the logistics business itself (OpCo).
* $60 million: Allocated to the warehouse real estate portfolio (PropCo).
During or after closing, the savvy dealmakers can then execute a sale-leaseback transaction.
Here's how it works:
1. Sale-Leaseback: savvy dealmakers sells the $60 million warehouse portfolio to a separate real estate investment trust (REIT) or another investor for a higher value, say $80 million. This price increase is often achieved by implementing strategic improvements or signing long-term leases with creditworthy tenants.
2. Reduced Acquisition Cost: With the real estate sold for $80 million, the Dealmaker's effective acquisition cost for the logistics business (OpCo) drops significantly. In this example, the basis becomes $40 million ($120 million total acquisition cost - $80 million real estate sale).
Benefits and Considerations:
* Lower Capital Requirement: This approach allows Dealmakers to acquire businesses with a lower upfront investment.
* Improved Investment Basis: By selling the real estate at a premium, the Dealmakers reduces the cost basis of the operating company, potentially leading to higher returns.
Have you heard or tried the classic Opco/Propco structure?
Hope this helps!
Sebastian H. Amieva