Ruby Tuesday, Backleasing and Owning Your Own Real Estate

The well-worn pages on lease-verses-buy in business textbooks makes much of a meal of equipment and motor vehicles but leaves glaringly absent the application to real estate. Perhaps the omission is the result of the specialised nature of real estate, which makes it difficult to provide simple illustration of principles. This brings us to Ruby Tuesday. Huh?Depending on your generation or where you live you may know that Ruby Tuesday was a song recorded by The Rolling Stones in 1966. The song, was a number-one hit in the United States and reached number three in the United Kingdom and five in South Africa.But Ruby Tuesday is also an American multinational restaurant chain, named after the Rolling Stones hit, that owns and franchises the eponymous Ruby Tuesday eateries. While the name and concept of Ruby Tuesday was founded in 1972, the corporation was formed in 1996 as a reincorporation of Morrison Restaurants Inc. The centre of operations is in Maryville, Tennessee, and from there 800 sites are operated worldwide.Going back a few years, analysts were asking if Ruby Tuesdays was the Canary in the Coal Mine with regards to the World Financial Crisis. Facing default on its loans back in 2008 the restaurant chain looked set to fall off its perch. Then began a programme of sale leasebacks which arguably saved the day. So what about sale leasebacks? Should companies own their own real estate to sell and lease back in the first place?Many companies have enormous sums tied up in commercial real estate that it owns and uses for its business, whether that’s warehouses, retail stores, head office or restaurants. In the US, department stores like Dillards and Sears own their own premises. Many restaurant chains like Ruby Tuesdays and Cracker Barrel own their own outlets. Zynga, the online gaming company recently acquired their headquarters building in San Francisco for over $200million. Google bought its new headquarters in New York in 2011 for nearly $2 billion. Microsoft and Wal-Mart also own a lot of their own property; however they are also examples of companies that have made much use of the sale leaseback.Commercial real estate is considered a capital intensive asset and includes, among others: office buildings, retail centres and industrial warehouses. The properties are subject to a lease contract that generally has a base rent, additional ‘rent’ covering the property’s operating costs like rates and maintenance, a term of three to ten years with the option for renewal. The base rental rate varies depending on the credit of the tenant and the location and age of the building.There is an argument that it doesn’t make economic and investment sense for a public operating company to sink large amounts of capital in its own real estate. In fact the argument is that a company should not own, or be in the business of leasing out its own real estate. Companies and in particular public companies should not be tying up capital in commercial real estate. Also, owning real estate may be considered a distraction from what should be the main focus of the business.In fact since the advent of the World Financial Crisis, the companies that have invested in commercial real estate are being encouraged to sell these assets and do a sale/leaseback unless the assets are of a ‘strategic investment value.’ The argument is that capital tied up in real estate should be reinvested into the company’s core business where the rate of return is greater than in a real estate investment. And there lies the rub: The expected return from investing in an operating business is expected to be higher than a real estate investment.So if what the investment firms’ have locked up in property isn’t producing a return other than that which is being saved on rent by owning the property, what is there to show for it? The amount saved is small in comparison to the lost capital investment. It could be concluded then that to multiply returns there should be a disposal of real estate assets and a reinvestment of that capital in the business to produce growth.Just a reminder as to what a sale-leaseback is: a sale leaseback option allows a company to sell its assets and lease them back simultaneously. This can be beneficial for businesses that are in need of an inflow of capital. Unlike a traditional mortgage, which often finances 70% to 80% of the property value, a sale-leaseback allows a company to get 100% of the value from the real estate.Bringing us back to Ruby Tuesday. Although as a covert strategy, purists may argue that the accumulation of real estate as a “rainy day fund” is a somewhat archaic idea, one can’t help admire in hindsight Ruby Tuesday’s desire to own substantial amount of real estate for their locations as forward thinking. As a ‘rainy day fund’ the idea is a fly in the ointment of the non-ownership school of thought.Ruby Tuesday has announced plans to acquire Lime Fresh Mexican Grill. It has launched a new television advertising campaign and increased projected annualized cost savings to $40million. The company has also begun implementing its sale leaseback plan to raise $50million through the sale and leaseback of nearly thirty outlets ending the first quarter of 2013. By quarter’s end, the firm completed a sale-leaseback deal on 8 properties, resulting in nearly $18 million in gross proceeds.So who’s to say, in the midst of sound financial common sense, which is what one might call the school of thought that would have businesses own as little real estate as possible, we encounter a glaringly perfect example of benefits of having real estate assets like Ruby Tuesday. One point is that Ruby Tuesday may not have been able to dig itself out if it were not for sale leasebacks, a potential solution for many medium to large enterprises to acquire much needed business investment capital.

How to Get Started in Real Estate Investing

IntroductionThis article has been written to provide a novice person considering real estate investing some fundamental concepts to consider as you commit yourself to this area of interest. Like all new endeavors explored, it will be to your advantage to have some basic knowledge on the particular topic before you can truly appreciate if this is right for you.What Are The Financial Benefits Of Investing In Real Estate?There are various opportunities that will financially benefit you by investing in real estate. Based upon your current financial condition and future investment goals, there are many factors that must be considered when selecting both a business model as well as a specific project. The following section will provide an overview on the significant financial benefits that are achievable when you invest in real estate.Property AppreciationAlthough predicting future appreciation with great certainty is not feasible, by looking at specific economic indicators can assist the Real Estate Investor in understanding future trends with regards to property value and possible appreciation. Some of these key indicators are as follows:Job growthJob growth is a key contributor in establishing possible future appreciation. As Primary jobs (those jobs that export products outside of the local area like the car makers of Detroit) increase, the need for Secondary jobs will also increase by 2-3 times the number of Primary jobs. Secondary jobs provide services to the people performing the Primary jobs. Examples of secondary jobs include the following:Restaurant workersRetail store workersLocal trades (plumbers, electricians, builders, etc.)School employeesDemographic TrendsDemographic trends are another factor to consider when trying to determine if an area has the potential for future appreciation. Demographic research will provide data on the general population of an area which includes the following:Population ChangesAge distributionIncomeFamily SizeRaceOwners verses rentersMarital statusRevitalization InitiativesAnother factor that can affect the appreciation of an area is any revitalization initiatives the local government is undertaking. Revitalization can include the following:Improvements of roads and transportationCondemning and removing abandoned houses and buildingsCrime reductionTax credit, grants, and loans to developers and Investors to come into the area as well as programs to help keep the current employers from moving away.Economic development offices from the local government are typically responsible for implementing and managing the revitalization efforts.Cash flowAnother aspect of how to financially benefit from real estate investing is through the creation of cash flow. Although there are many factors that are taken into consideration that derives your cash flow, simply put, it is the amount of money left over for you after all of the expenses have been paid.The term cash flow is usually associated with properties that you are holding and generating income from rental units or homes. The great thing about creating a cash flow stream is that it will typically continue whether you stay in bed all day or off on a vacation. However, sustaining this cash flow will take some effort on your part and may include the following:Maintaining the propertyManaging the existing tenantsKeeping the property occupiedManaging property management companiesEquityProperty equity is the difference between the fair market value of the property and the sum of all of the loans against the property. For example, if a property is worth $250,000 and there is a first and second mortgage totaling $200,000, the property has $50,000 in equity. Having equity in your property is essential in order to have a cushion in the event the market exhibits declining value during the time you are holding the property. By utilizing strategies like a refinance or Line of Credit, it will allow you to pull this equity out of the property and use it as you see fit including a return of your initial investment or to leverage this capital to purchase another property. Although having strong cash flow with your properties is vital during your hold times, this income stream will disappear if you ever need to sell the property. Ultimately, it is the equity in your properties that will help set the stage for your long-term wealth creation and financial security.Tax IncentivesIn addition to the benefits mentioned above, there are outstanding tax incentives that the real estate investor can benefit from, they include the following:Depreciation of the actual property and any capital equipment that may be utilized in your business.Deductions resulting from expenses from owning and managing the property the property as well as business expenses you may incur.IRC 1031 exchanges, this is a powerful tax strategy that will allow you to leverage Capital Gains taxes that you would normally pay on the sale of an investment property and defer paying those taxes by purchasing a “Like-kind” replacement property with the full proceeds you received from the sale.Why Do You Want To Invest In Real Estate?It will be important for you to understand what reason(s) have motivated you to be interested and involved with real estate investing. Over the years, I have spoken to many new Investors on this subject and I have boiled it down to the following reasons:Supplement Your Current IncomeThere are some people who are looking at just supplementing their current income without the intention of leaving their current profession and look at real estate investing as their second job. The Investor’s that fall into this group are fortunate because they are not relying solely on real estate investing as their primary source of income, this will be very beneficial during the time you are developing you real estate skill set and investment portfolio.Take Control of Your Financial FutureBased upon the many years of speaking with Real Estate Investors, perhaps the most compelling reasons people consider real estate investing is the ability for you to have a significant influence of your financial security and for you to control the level of income you would like to receive.Create a Retirement Plan for YourselfUsing real estate investing as a vehicle to establish or augment a retirement plan is another common motivator I hear frequently from new investors. It is understandable that when economic conditions include downsizing, cost of living increases, and the fear of Social Security meltdown, people are concerned about having an adequate financial foundation to sustain them during their retirement phase of life.Critical Things to Consider Before Considering Real Estate InvestingInvesting in real estate is certainly not for everyone and it will be important for you to honestly assess if this is the right path for you. The following section will provide some basic questions you should ask yourself as you evaluate the feasibility of becoming involved as a Real Estate Investor.How Much Time Will You Have To Dedicate Towards Real Estate Investing?As we all know, you can’t create anymore time; there can only be 24 hours in a day. As you consider real estate investing, you will need to be realistic with regards to how much time you will have to devote to this endeavor. With today’s fast paced society that requires multiple income sources combined with the commitments you may already have with your family, many people can be left with little or no time to devote towards their real estate investing goals.Are You Able To Motivate Yourself And Have The Discipline Required To Succeed?Having the desire to be a successful Real Estate Investor is only part of the equation for ultimate success. Along with the desire to succeed comes the need for you to be able to motivate and discipline yourself. Real estate investing is certainly not for everyone despite the late