Sale and leaseback

A sale and leaseback (cession-bail in French) is a transaction in which the owner-operator of a hotel sells the property to an investor and immediately leases it back. The operator keeps the business and the operation, and turns a property asset into cash in return for paying rent.

In the hotel sector

The transaction can fund a capital expenditure programme, reduce debt, prepare a succession or, for a group, rebalance its property holdings without leaving its hotels. The investor is buying an income stream: the value of the property depends on the rent, the fixed term of the lease and the financial strength of the tenant. The lease is generally long, with a specifically negotiated allocation of charges and works, including major structural repairs.

In a transaction

The balancing point is the rent. A higher rent raises the price of the property, but it weighs on EBE, the French measure of EBITDA, and therefore on the value of the business the operator keeps. The rent must remain sustainable: this is measured by rent to revenue and by rent cover from EBE before rent, over several years and under a downside scenario. The other terms are negotiated alongside the price:

• fixed term and renewal conditions
• indexation and any uncapping of rent on renewal
• allocation of works and equipment replacement
• parent company guarantee and any buy-back option

Like any disposal, the transaction is best conducted without needlessly alerting the franchisor, banks and staff until the terms are agreed.

Not to be confused with

• Property leasing (crédit-bail immobilier), a financing arrangement under which the lessee is intended to become owner again at the end of the contract.
• A sale of a let property by an owner who does not operate the hotel: the lease already exists and nothing new is created.

For an off-market disposal: the Circle.