Sale Leaseback Case Study-On Market Sale vs. Hotel Sale Leaseback-Receiving Offers

As a hotel seller, the decision to sell a property can be a challenging one, particularly if it is generating strong cash flow and is an integral part of the seller’s business. In this case study, the hotel owner developer has a limited service asset generating $2,000,000 in NOI, but the market conditions dictate an 8% cap rate for the region. This means that the desired purchase price for the property is $25,000,000.

However, offers coming in from potential buyers are only in the range of $21-$22M, which is below the desired purchase price. This is where a sale-leaseback platform such as ZEL Capital Partners’ can provide a compelling alternative for the seller. The sale-leaseback term sheet offered by ZEL Capital Partners is for $20,000,000, which is lower than the desired purchase price but still within the range of offers coming in from potential buyers.

The significant benefit of the sale-leaseback for the seller is that they get to keep the Opco and continue to generate cash flow from the property. Additionally, ZEL Capital Partners offers the seller a management fee, $500k cash flow after lease payment, and all the upside of NOI growth. The buyback option, which provides a path back to the fee with significant equity arbitrage to the seller/new tenant if exercised, is also a compelling feature.

From an investment perspective, ZEL Capital Partners’ sale-leaseback platform offers the seller a higher internal rate of return (IRR) compared to a straight sale. The IRR for the seller is calculated as the cash flow generated from the sale-leaseback over the life of the lease, plus the proceeds from the buyback option, minus the purchase price of the property. This IRR is typically higher than the IRR from a straight sale, where the seller receives a lump sum payment upfront but loses the cash flow generated by the property. The sale-leaseback option may also provide benefits from capital gains/tax reassessments.

Overall, this hotel sale-leaseback case study demonstrates how a sale-leaseback platform such as ZEL Capital Partners’ can provide a compelling alternative to a straight sale, particularly in situations where the seller wants to keep the Opco and continue to generate cash flow from the property. With the potential for a higher IRR, a sale-leaseback can be a much greater benefit to the seller than a straight sale.