This article was published in 2020 as part of our COVID-19 Resource Center series. This article will not be updated but please contact us if you have specific questions regarding the information in this article.

In the midst of the COVID-19 pandemic, we have been asked about the options available for owner-occupiers to leverage the value of their real estate to ease the significant loss of revenue businesses are suddenly encountering. 

At AQUILA, we understand that businesses that own the commercial real estate they occupy have different requirements than traditional commercial real estate investors. This is why we have been working with our network of brokers, owners, and lenders to understand how businesses that own their own real estate are getting creative to get capital out of their real estate during these unique times.

In this article we will help answer the questions we’ve been getting and discuss:

  • Short-term solutions that can provide immediate relief
  • Four possible solutions that could provide more substantial relief


Short-Term Solutions for Immediate Relief

Government Assistance

The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by the US Legislature, helps companies and individuals affected by the COVID-19 crisis. One of the key components of this legislation is the Paycheck Protection Program (PPP) which is a forgivable loan that can be applied to payroll as well as healthcare benefits, interest on mortgage payments, interest on any other debt, and rent (including utilities) incurred during the eight-week period beginning on the date the loan is closed.

For owner-occupiers, this means that in addition to applying for funds to cover payroll, healthcare benefits, and standard business expenses, owners can apply for the funds required to keep your property operating. This can include mortgage payments, property taxes, and other operating expenses to keep your property’s lights on during the funding period. 

For more information on how the program can provide relief and how to apply, read our article: How the Paycheck Protection Program Can Help Companies Cover Office Rent

Debt Service Deferment

If you have a mortgage on your property, it’s important to communicate with your lender as early and as frequently as you can. While each lender is unique, many lenders, especially local banks, are offering borrowers the ability to defer up to three months of their debt service payments during this time. 

If your lender allows you to elect to defer any debt service payments, the payments are usually added to the end of the term. For example, if you had 36 months remaining on the term of your loan and you elect to defer three months of payments, your loan term will be 39 months. While you will still be charged interest on the principal and deferred payments during the period, typically any penalties and potential defaults will be waived. 

Read Next: 5 Documents Landlords Should Ask for from Tenants Requesting Rent Relief


Four Ideas for Accessing Equity From Your Real Estate

Since every business will be impacted by the COVID-19 pandemic differently, we have been exploring other options available to property owners in addition to the above short-term solutions. 

We found that owner-occupiers have several options to gain substantial access to cash by leveraging the value of their property outside of an outright sale. Here are four potential scenarios that owner-occupiers might explore, depending on their unique situation:

1. Refinance Your Mortgage to Access Equity

If it has been a few years since you purchased or refinanced your property, refinancing your property could be a great way to pull cash out of your property. While lenders have tightened up their credit requirements due to the current environment, banks are still refinancing properties to allow owners to pull cash out of their property through loan proceeds. When banks determine the loan amount they will lend against a property, the amount is calculated based on a formula called Loan-to-Value. Historically, local banks will lend an amount up to 65% loan-to-value for improved properties. 

For owner-occupiers, this means that if your property is valued at $1,000,000, you could receive a loan from a bank for $650,000. If your existing mortgage is less than $650,000, you could access the equity you’ve built in the property and pull cash out equal to the amount of your new mortgage minus your existing mortgage. 

This could be an attractive option for companies who think they will need more liquidity than what the government subsidies are offering and whose current mortgage balance is less than 50% of the market value of the property. Different types of lenders will offer different loan values to owner-occupiers, so it’s important to talk to your broker about the different financing vehicles that may be available to you. 

2. Sale-Leaseback

In a sale-leaseback, the owner sells the property to a buyer and simultaneously signs a lease to occupy the property and pay rent for a predetermined amount of time. The lease term can be as short as six months, to ensure you have enough time to move locations, or as long as 10+ years if you want to stay in your existing building for the long term. Unlike an outright sale, the sales price for a sale-leaseback is dependent on more factors than just the market value. Rent payments are typically determined based on a yield (percentage return, or cap rate) of the purchase price required by the buyer. 

This is a good option if an owner-occupier would like to cash out on all of the equity they have built in the property like they would in an outright sale of the property but needs to remain in the location to maintain the operations of the business for a given time. The lease length and the rent the seller will be paying are important factors that will impact the proceeds available to the seller, so be sure to consult with your broker to determine the best way to structure the transaction to achieve your goals.

Read Next: Best Commercial Real Estate Investment Sales Brokerage Firms to Buy and Sell Property in Austin, Texas

3. Ground Lease

In a ground lease transaction, the owner-occupier sells the land underneath the building while maintaining ownership of the building, all improvements on the property, and any future development rights. 

Similar to a sale-leaseback, simultaneously with the sale of the land the seller signs a ground lease to occupy the land and pay ground rent for a predetermined amount of time. Unlike a sale leaseback, however, the lease term in a ground lease can range from 25 years to 99+ years. At the end of the ground lease, the parties either work out an extension or the original seller turns over the building to the ground leaseholder. 

It’s not uncommon for the occupier to have a purchase option or multiple extension options at the end of the ground lease term to preserve the company’s rights to remain in the building for the long term. This structure might sound unusual, but some commercial real estate investors view a ground lease as a low-risk way to receive long-term annual cash flow. 

This could be a good option if you are confident you will be staying in your building for the long term and want more control of your occupancy at the property into the future or if you want to preserve the option to develop additional improvements on the property as you please. 

Depending on the property, the land value can range from 30% to 60% of the total value of the property, so the cash proceeds you can pull out from this option will be less than in a sale leaseback. However, the ground rent payments are also lower than they would be in a sale leaseback because you are only “renting” the land, not the building, and commercial real estate investors typically require lower yields than they would in a sale-leaseback. 

See a ground lease in action. Find out how AQUILA successfully negotiated a ground lease on behalf of Lutheran Campus Ministries, enabling the organization to monetize its land while remaining on site.  

4. Lease Unused Space

If you have some extra space in your property and could use some help offsetting the operating costs of your building, you could lease out some space to another business that is looking for space. This allows you to create an additional revenue stream to help cover your business expenses.

Read Next: Interviewing Leasing Firms for Your Commercial Property? 5 Questions You Must Ask

As we have laid out, there are various options for property owners to leverage their real estate during this uncertain time. If you have questions about any of these options or would like to discuss your company’s unique situation, please schedule a consultation with one of our commercial real estate investment services brokers.

For more resources related to real estate and COVID-19, please visit our COVID-19 Resource Center

Andrew Reue | AQUILA Commercial

Andrew Reue

As a member of AQUILA’s team, Andrew leverages his experience in financial modeling and property due diligence to guide clients through the complete commercial real estate investment cycle from identifying purchase opportunities to disposition and everything in between.

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