Allyson Colby: Real Estate Offers Alternative Methods of Raising Finance; Simon Russell, Partner Responsible for Corporate Services at the Birmingham Office of Weatherall Green & Smith, Looks at the Options Now Available to Owners of Releasing Capital for Use in Core Business
Byline: Simon Russell
Businesses have come under enormous pressure over the last decade to maximise the return on resources.
The most successful have been ruthless in ensuring that capital is allocated to produce the best returns.
Increasingly, return on net assets is key to providing outstanding performance and shareholder value and it is an often overlooked fact that UK firms have more than pounds 100 billion tied up in the ownership of commercial property. In fact, it frequently comprises the majority of their assets.
One recent study showed that returns on capital could be improved by disposing of property altogether. However, the alternative of renting accommodation may not always be the right answer.
Historically, there have been only two ways in which capital can be released from property; either a company sells the property and enters into a traditional lease; or raises debt.
While these two options still form the basis, we have seen in recent years the development of a vast array of more advanced structures.
Each will raise different amounts of capital, and there are a number of advantages and disadvantages in terms of both the flexibility and cost of occupation as well as other wider issues including accounting and taxation.
As an owner, you have the option of either disposing of the ownership of the property in return for some form of occupational contract, or raising some form of secured capital.
However, the choice between owner and tenant is not simple. Some property can and should be sold.
Other property can be held, refinanced or even purchased. When deciding on which option is best an owner should look at five main issues;
Capital that can be released.
Level of financial or lease commitment that the company must enter into secure occupation.
Level of occupational flexibility.
Tax and accounting treatment of obligations.
Share of capital appreciation.
All financial directors should have a thorough understanding of the real costs of commercial property.
It not only represents a significant expense, but the opportunity costs of reinvesting the capital elsewhere in the business can be huge.
The property and finance markets have developed to provide new opportunities for companies to change the way they hold property.
Each route will have different balance sheets, gearing and operational implications and will release a different level of capital for investment.
An example of releasing property capital is Focus DIY Ltd. In 1998, the management of Focus DIY Ltd completed a leveraged buy-out of Do It All from Boots the Chemists. …