Understanding the Value of Owned vs. Leased Real Estate in M&A

In mergers and acquisitions (M&A), real estate often represents a significant portion of a company's assets — yet it's frequently undervalued or misunderstood during the transaction process. Properly assessing both owned and leased real estate is crucial to unlocking value, optimizing financial outcomes, and ensuring the success of the deal. Here's a breakdown of key considerations when evaluating owned and leased real estate in an M&A context.

Owned Real Estate

Asset Valuation

Understanding the market value of the target company’s owned properties is essential, as these assets will impact financial statements post-acquisition. Many buyers focus solely on balance sheet impacts, overlooking how owned real estate can influence the income statement (e.g., depreciation, taxes, operating expenses) and cash flow statement (e.g., capital expenditures). Proper valuation not only aligns financial incentives but also ensures the acquisition delivers expected returns.

Sale-Leaseback Transactions

Sale-leaseback transactions offer a strategic way to unlock capital tied up in real estate while retaining operational control of the property. These agreements allow companies to sell owned assets and lease them back under flexible terms that align with their operational lifecycle. In the context of M&A, sale-leasebacks can serve as a funding tool to raise equity for the acquisition or improve post-close liquidity and cash flow. For companies unable to access long-term fixed-rate financing, sale-leasebacks provide a compelling alternative, offering lower annual costs compared to traditional financing.

Surplus Assets

During the due diligence phase, buyers often identify surplus properties within the combined portfolio. These redundant assets can be sold to generate significant cash or reduce costs. Additionally, some target companies may own properties in high-demand markets where the real estate’s intrinsic value surpasses its operational importance. In such cases, companies can sell these high-value properties at top market prices and relocate operations to lower-cost locations, maximizing returns while streamlining their portfolio.

Leased Real Estate

Lease Obligations and Flexibility

Leased properties provide flexibility, allowing companies to scale operations according to market conditions. A thorough review of current lease agreements — including duration, renewal options, and termination clauses — is essential. However, beyond the lease terms, it’s equally important to consider broader market dynamics and future projections.

Assessing factors such as labor trends, population growth, construction pipelines, incentives, and infrastructure can help companies better plan for future lease costs and financial impacts. Implementing a forward-looking strategic plan during due diligence can uncover value creation opportunities and identify cost-saving measures that support long-term growth.

Accounting Implications

Recent changes in accounting standards, such as FASB’s lease accounting rules, have placed more lease liabilities directly on the balance sheet. In industries with a heavy reliance on leased real estate, these long-term obligations can affect a company’s creditworthiness and debt capacity. A detailed understanding of lease commitments is critical to accurately assess the financial health of both parties in an M&A transaction and avoid unforeseen risks.

Final Thoughts

Real estate is a key asset class in M&A deals that requires careful evaluation to unlock its full value. By understanding the nuances of owned versus leased real estate, companies can improve liquidity, reduce costs, and enhance financial outcomes. Whether it’s leveraging sale-leasebacks or managing lease obligations, a proactive approach to real estate strategy can significantly impact the success of any acquisition.

For more insights and resources on real estate strategy during M&A, download the whitepaper The Importance of Real Estate Portfolio Optimization in M&A Transactions.