+33(0)173101995Real estate assets financed through leasing can ultimately reinforcethe company's financial strength in the event of resale.
The real estate leasing market slowed for the second consecutive year, with production down 7.5% in 2017, mainly in office property (-32.5%). But leasing financing is no less attractive. This financing method involves all buildings for professional use. These can be operating tools such as offices, commercial premises in the suburbs, local retail shops of a large brand or logistics and messaging platforms, but also specific products such as clinics or hotels.
Lease financing remains an attractive solution
"In a context of very low financial rates, the trend towards leasing remains favourable", confirms Jean-Claude Dubois, Chairman of BNP Paribas Real Estate Valuation France, "the leasing fee is indeed lower than the cost of a conventional rent. For a real estate asset with, for example, a rate of return in the order of 4 to 6% while the leasing rate is less than 4%, the company maintains a margin above 2% if it has a good ratio in terms of financial rating.”
A fundraising or a bank loan will not have the same impact on the company's consolidated accounts. In fact, leasing makes it possible to finance 100% of the investment while a traditional loan only 60% to 80%. During the entire period of the real estate leasing contract, the tenant company will pay royalties to its lessor. Since the corporation does not own the property, it cannot capitalise the property on its balance sheet. This commitment therefore appears off-balance sheet, in the annual financial statements’ notes, in accordance with French accounting rules. Only companies producing IFRS financial statements are required to record the leased asset as a capital asset, with a corresponding liability of the same amount on their balance sheet.
The leasing agreement includes a call option at maturity. If the company decides to acquire the property, it will buy it at its option value, i.e. at the selling price agreed when the lease contract is signed. The amount of this purchase option, from which royalties paid during the lease period must be deducted, is then reinstated in the company's balance sheet and recorded as capital assets.
Thanks to this accounting mechanism, "companies hold, for some of them, assets recorded at their net book value on the balance sheet, a net book value which includes depreciation of building components and which is well below the property’s market value. They thus have hidden gems in their balance sheets. The potential capital gains recorded in the balance sheet at their market value will enable them to generate cash flows as soon as they decide to sell their property. They can therefore improve their financial strength to acquire other more recent assets.", Jean-Claude Dubois explains.
In practice, leasing financing remains a good deal insofar as a company outsources its asset to its true market value and can, therefore, generate profits to increase its equity. Finally, "when choosing financing, it is the cost of exercising a call option which is determinant with respect to the asset’s value, discounted at the market price at the end of the leasing contract," concludes Jean-Claude Dubois. "The important thing is therefore to have a fair valuation of the rent in the asset market to be able to compare the lease fee and the cost of a conventional rent. It's a question of opportunity.”
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