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Sale Leasebacks Play Increasing Role In Franchise Finance

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Sale Leasebacks Play Increasing Role in Franchise Finance

  • Traditional franchise bank loans in the chain restaurant space have steadily decreased as a percent of total funding with the mix falling from a pre-recession level of 94% to 84% expected this year.
  • In turn, the sale leaseback financing mix has increased from 5% to 14% during this same period.
  • As evident in chart below, traditional bank loan originations increased sharply in 2012 with most of the gains expected to hold this year. Therefore, it is important to understand that the growth in sale leaseback financing has been incremental to total origination growth with the arrival of Store Capital in the middle of 2010 having a big impact on the overall market.
  • Increased sale leaseback activity benefits from steadily lower cap rates which, in turn, increase real estate collateral value.
  • Implications? The possibility of real estate appreciation provides a big reason to invest in a restaurant franchise. While unit level P&L fundamentals have been driving the business for some time (as the real estate market tanked), a rising real estate market provides added confidence to both operators and lenders.

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Source: RR's Restaurant Finance & Valuations Report - February 2013

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Restaurant Research LLC leverages an extensive network of industry players as part of its annual Concept Benchmark Analysis due diligence process for 22 large US restaurant chains. Also, RR tracks store level data for all major chains with system-wide sales in excess of $1B across all major restaurant segments in order to produce 11 key Industry Data Topic reports.

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Disclaimer of Liability: Although the information in this report has been obtained from sources Restaurant Research® LLC believes to be reliable, RR does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. Restaurant Research's analyses and opinions are not a guarantee of the future performance of any company or individual franchisee. RR disclaims all liability for any misstatements or omissions that occur in the publication of this report. In making this report available, no client, advisory, fiduciary or professional relationship is implied or established. This report is intended to provide an overview of the restaurant industry, but cannot be used as a substitute for independent investigations and sound business judgment.