WHO, WHAT, WHERE, HOW, WHY?
All the answers to your liability outsourcing questions.
IN THREE SIMPLE SENTENCES, HOW DOES IT WORK?
You transfer your leasehold liabilities and all associated obligations, using a power of attorney governed by a master and management agreement, to Surplus Property Solutions (SPS).
On an annual or quarterly basis you transfer a reverse premium, based on an agreed liability cost per property.
SPS manages the leasehold liabilities from completion as if they were our own and you don’t have to worry about them any more.
WHY SHOULD I CONSIDER OUTSOURCING MY LEASEHOLD LIABILITIES?
- To put your problem in the hands of a specialist with an outstanding track record
- To get rid of your leasehold liabilities far more rapidly than otherwise possible
- To remove management responsibility for your portfolio allowing you and the property team to focus 100% on your core business
- To provide you with financial certainty
- To reduce headcount and/or managing agent costs – SAVING MONEY
- To reduce your balance sheet provision to a nominal sum – SAVING MONEY
- To gain the business and political benefit of solving an intractable and potentially historic problem
WHAT ARE THE CONS OF TRANSFERRING MY LEASEHOLD LIABILITIES?
- Gathering liability data in order to transfer to SPS may require a time commitment and some costs may be incurred on legal and surveying fees
- If you are under-provided then you may need to make an additional provision
WHICH COMPANIES HAVE OUTSOURCED THEIR LIABILITIES?
Over the past 11 years a good number of major UK companies have completed leasehold liability transfers. These include Rentokil, Santander, Morrisons, Carillion, RBS Equity Finance, Virgin Media, Wolseley, EMAP, Barclays, Whitbread and B&Q.
WE ARE GIVING YOU A LOT OF MONEY AND YOU ARE A SMALL COMPANY – WHAT PROTECTION DO WE GET?
- The reverse premium is paid through staggered payments, providing you with financial security
- We do not get rewarded until YOUR goals are achieved
- All of our key people have blue chip corporate backgrounds and understand reputational risk. We will protect your reputation – please speak with any of our current or past counterparts to understand how sensitive we are to this
- At no additional risk or cost to your business, you get the best in the liability business working for you
- Although we are small we have a great pedigree with blue-chip senior management experience and a very robust balance sheet – and finally, our own reputation is our greatest currency
WHY IS SPS THE BEST PARTNER FOR MY LEASEHOLD LIABILITIES?
- A strong track record: over the past 11 years we have completed 7 property liability transactions comprising over 220 leases, seven million square feet of property and a gross liability of over £500 million. Most of these portfolios are fully worked out
- We are the most experienced liability outsourcing partner with a demonstrable ability to work out both simple short stub surrenders and more complex multi-dimensional liabilities
- Many landlords are known to us and we can gain speedy traction
- We have extraordinary bandwidth and can take on both large and small portfolios
- If we don’t make a success for you we don’t get paid
- FOCUS, FOCUS and FOCUS – getting rid of leasehold liabilities is all we do
WHO IS SPS?
- SPS was founded in 2006 for the sole purpose of undertaking leasehold liability outsourcing and has offices in London and Glasgow
- SPS has a core team consisting of principals, general and building surveyors, administrators plus a scalable set of top advisors
- For dilapidations we have a 35-strong construction team and decades of commercial experience
- We have shareholder funds of more than £10m and over 100 property assets are owned and managed by the SPS group
HOW DOES SPS MAKE MONEY?
SPS is remunerated by getting rid of all of your leasehold liabilities for less than the reverse premium amount. We only make money once you no longer have any risk associated with the leasehold liability portfolio – what we term as “off-risk”. Specifically, this is when the remaining reverse premium is greater than the remaining liability and this usually occurs within the first three years after the transfer of liabilities.
HOW DO I SAVE MONEY?
In two ways: by getting rid of your liabilities below provision and the outsourcing allows you to rationalise and optimise your property management costs.
WHEN DO I PART WITH THE REVERSE PREMIUM?
Although the reverse premium is agreed at the outset of the transaction, it is only paid over to SPS on a quarterly, semi-annual or annual basis, depending on what is most appropriate for your organisation. Amounts can be pulled forward from the reverse premiums to pay for surrenders.
WHAT LEGALS AND DILIGENCE ARE REQUIRED, AND WHO PAYS FOR IT?
Assuming we receive clear and complete information on each leasehold liability, we then perform due diligence on the documents and the properties at our own cost.
Normally a master and management agreement are put in place. Over the past eight years these documents have become broadly standardised. Limited legal work will be required to customise the agreements.
WHAT’S THE ACCOUNTING TREATMENT?
The accounting treatment will follow the transaction structure. Under the Management Agreement the corporate’s provision will be locked in at the transaction price. If there are monies in excess of the transaction price in the provision, then the corporate has the option of releasing the surplus.
If a guarantee is put in place from SPS to the corporate, then the provision, net of the deal price, can be released.
DO I REALLY TRANSFER THE LIABILITY TO YOU? PROVE IT!
Although we can’t replace you on the lease (the landlord would have to agree and in our experience landlords are rarely co-operative) we take over all the responsibilities associated with the liabilities and replace you in every other way. This includes all interactions with the landlord, paying and receiving rents, dealing with and paying the rating authorities and utility companies, managing lettings and sub-tenants, physical maintenance and dilapidations and security. We also have the right to litigate if necessary, with your consent.
WILL THE LIABILITY EVER COME BACK TO MY COMPANY?
We can provide an insurance policy that will, in most cases, guarantee that the liability never comes back. Most of our counterparties don’t take this insurance because it is significantly cheaper to rely upon our abilities, as demonstrated by our track record.
In the very worst case, where the reverse premium runs out before the last liabilities are entirely extinguished, you will still have had the very best professionals working for you for free. And you will have achieved a level of success that would have been impossible to achieve with non-specialists.
WHY AREN’T MORE COMPANIES DOING THIS? WHAT ARE THEY SCARED OF?
A good number of major companies in all sectors have outsourced their liabilities. These include Rentokil, Santander, Morrisons, Carillion, RBS Equity Finance, Virgin Media, EMAP, Wolseley, Barclays and B&Q.
However, the principle obstacles cited by companies who decide not to do this type of transaction are:
We don’t have a big enough provision.
Counterpoint: With the lease accounting changes there is no doubt that now is the time to make sure that you do have a big enough provision for your leasehold liabilities. But it also the best time to remove the problem altogether, so that you are not affected.
We are happy the way it is (aka. momentum and fear of the unknown).
Counterpoint: With this kind of attitude it’s just a matter of time before you need to find a new job.
It’s not really a problem for us.
Counterpoint: If you have leasehold liabilities then you have almost certainly had them for a while, and if you have had them for a while they are a problem – you are managing them, paying rent and possibly rates, and have uncertainty on dilapidations and any subtenant covenant. For most businesses this situation would be defined as a problem, or certainly an opportunity to do better.
Why can a specialist leasehold liability outsourcing company, SPS, do better than we can?
Counterpoint: See all of our website. The bottom line is we are specialists. This is all we do and we can do it better than anyone else. And we focus, focus, and focus. Corporate Real Estate teams are primarily focused on delivering added value to the core business. Surplus property is not part of the core business and the skill sets and approach are different.