Summary
There are better ways to raise capital to fund operations and growth than divesting precious real estate assets. The cash flow implications of sale-leaseback transactions are daunting over the long haul, and will ultimately have a negative impact on many operators. Restaurateurs should resist this method of capital formation if at all possible.
Analysis
Restaurant companies resort to sale-leaseback transactions to raise cash for one of two reasons: (a) they may have no other ready and affordable source of operating funds or capital for growth; (b) they are hoodwinked by investment advisors into believing that hard assets are not valued appropriately by the market and a sale-leaseback transaction can "unlock" that value.
Both scenarios fail to withstand closer scrutiny.
In the first case, divesting existing assets in order to grow makes sense only if the return on the development exceeds the cost of the raised capital. In evaluating sale-leaseback transactions, it is important to consider the opportunity cost of capital, which in this case includes the foregone appreciation of the value of the underlying property. Most restaurant properties are prime and desirable real estate, which continue to increase in value (with very rare exceptions) no matter what the prevailing macro economic situation.
The more profound implication, however, is to the cash flow of the enterprise. Lease expense after the transaction is often higher than the cost of alternative financing, especially in times when interest rates have declined significantly.
If the transaction is designed to raise operating capital, it should be considered only as an option of last resort. It eliminates the one asset with any true value for a concern with neutral or negative cash flow, rendering the remainder of the business essentially worthless (unless the cash infusion actually results in a turnaround of the operating results of the business. This rarely happens).
As for the idea of "unlocking" unrealized value, that represents an even more spurious argument. The market may, in fact, not price a firm based on its hard asset base (especially when those assets are typically reflected on its balance sheet as purchase price rather than actual current value), but the effect on cash flow of owning property fee simple (hence, not writing a rent check each month) is most assuredly considered in any competent valuation model.
Especially when times are tough (as they certainly are right now), cash flow is king, and anything done to weaken that dynamic should be approached very, very cautiously.
One more thing to consider: additional debt can be paid off, but property cannot be "unsold." The windfall cannot be replicated. And the resultant lease payments go on (virtually) forever. A one time infusion of cash accomplished by this method comes at a potentially high price indeed.
