How can I best release capital from the fixed assets?

24 August 2006
How can I best release capital from the fixed assets?
How can I best release capital from the fixed assets in my chain of restaurants and hotels? David Coffer, Coffer Corporate Leisure This is a timely question. There has not been a stronger investment market, to my memory, and there is unlikely to be a better time to liquidate property assets. There are several avenues available to you. One which is currently popular is the creation of an operational company and a property company (known as an opco/propco structure), which essentially means you will have one company that trades and a dedicated property company that benefits from conversion of EBITDA into rental. The essence of this equation is that, currently, property investment capital values are more than double those of the capitalised operational values in the marketplace. Once this structure is in place, you can, if you wish, refinance or sell off the property company, leaving the operational company with a rental outgoing, obviously with less operational profit but still with a residual value. The enriched property value together with the residual operational value would normally be far higher than the straightforward capital value. The traditional sale-and-leaseback route is still available to you, should you have long leasehold or freehold assets and a worthwhile tenant covenant. The investment so created would be sold into an investment market and, once again, your operational company would continue with contemporary leases. Other alternatives would include the securitisation or the sale of guaranteed income stream, but this depends on the calibre of the company and the rating of the income stream. You could, of course, refinance via traditional bank loans. Right now, banks are very liquid and are pleased to help good operational companies.]( Paul Thompson, Acorn Commercial Finance The biggest asset most companies own is their property. Equipment and vehicles can also be used to raise funds but, generally, the amounts raised will be relatively small. For a trader or company who has been in a business for a reasonable amount of time, there are a number of factors allowing capital to be released from the business premises. - Inflation in property values: commercial values have outstripped residential in the past few years. - Increasing the trade in an outlet gives it a higher market value. - Other factors - such as local developments, and scarcity of property with the appropriate planning consent and licences - may also enhance the value. In many cases, especially where the value of the business has increased, there is the opportunity to "gear up" the lending. This is effectively remortgaging the business to a higher level. It might be possible to move the lending to a source more sympathetic to the hospitality trade and thus increase the loan to a percentage of market value rather than the property value. Such lenders will typically also be comfortable with a higher loan-to-value ratio. As the refinancing would be done with a great deal more financial information available than at the time of purchase, it is much easier to obtain lower interest rates and, typically, longer terms - so monthly payments can actually be smaller despite the loan being, perhaps, significantly greater. []( Lee Vines, Kitchen FM Outsourcing the ownership of fixed assets can also apply to kitchen equipment and catering estates. There is no longer a need to tie up capital in depreciating assets and to drain revenue budgets through maintenance charges. Refurbishing even part of your catering equipment estate can cost hundreds of thousands of pounds, and then there are the maintenance contracts, installation and replacement parts eating into your revenue budgets. By outsourcing the ownership and maintenance of catering equipment, capital can be released to spend on front of house, extended menu options or other core business areas. Kitchen FM is a service provided by PKL, a portable kitchen and catering equipment specialist that designs, installs, hires out and manages catering estates. Outsourcing enables operators to sell their kitchen equipment and then have it looked after for a fixed monthly fee. Contracts typically last five years and include all equipment provision and maintenance, engineer callouts and parts. Upgrades and replacements are also included. L'Auberge restaurant at the Onslow Arms in Surrey, for example, recently sold all its kitchen equipment to Kitchen FM at market price. The Onslow Arms is owned by the Massive pub group, whose managing director Peter Linacre says: "All our service and maintenance is now dealt with in one contract." Routine preventive maintenance and health and safety assessments are included, and any failures - including ventilation and refrigeration - must be dealt with under the contract. Anything that can't be repaired is replaced, so the financial risk shifts to Kitchen FM, and the Onslow Arms can focus on its core business. [
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