01 — The Engagement
What the plant had to clear.
A manufacturer evaluating a build-to-suit lease on a new plant, ten year initial term with an option to buy at maturity. We built the operating and financing model across worst, base and best cases and wrote the memo off the worst case, because the question was not what the project could earn but what it had to clear.
Model
Lease extension against buyout
A monthly operating and financing model through the development period and fifteen years of operations. Revenue was built from plant capacity, the ramp-up path and price escalating with inflation, against variable costs, fixed costs on a standalone basis and the share of overhead the existing plant would absorb. At the end of the initial term the model ran two paths side by side, extending the lease or exercising the buyout with bank financing, with the equipment financing carried in both.
01
Operating risk
Two utilization floors
What management used was a pair of floors: the utilization the plant needs to break even on a present value basis, and the higher utilization it needs to throw off positive cashflow from the first month of operations. Those two numbers defined the operating risk envelope going into negotiations.
02
Sensitivities
The variables that move the answer
We then isolated the variables that actually move the answer, overhead absorption from the existing plant, the ramp-up path, financing rates and the buyout price, and set out what management had to confirm on each, from the backlog behind the ramp-up to rate protection on the debt.
03
Negotiation
The lease terms worth negotiating for
A lessee-controlled extension, a commissioning grace period, defined rent escalations, capped NNN standards with no surprise capital charges, and a buyout price fixed contractually, or within a narrow collar, rather than left open to Year 10.
04
Scope
Pre-tax, before working capital
The analysis was run pre-tax and before working capital, and said so on its face, with both flagged for full underwriting. It tested viability on management's operating, cost and commercial assumptions rather than forecasting demand or pricing cycles.
05
The standard was set at scale. It is applied every week.
