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NewsCalifornia Real Estate JournalMay 13, 2008 Credit Crunch Pushes Popularity of Sale-Leasebacks
Buyers, sellers see advantages, but transactions harder to finance
BY MANDY Corporations are increasingly looking to sell real estate to free up capital for their businesses, but the challenge of financing all types of commercial property investments has reduced the value companies can expect to achieve in a sale-leaseback. All-cash investors have the upper hand as corporate real estate executives analyze their options for selling company-owned assets and leasing only the space needed to operate effectively. But among leveraged investors, those looking at sale-leasebacks may have an advantage as lenders consider the relatively low risk of corporate real estate. Michael Roberts, a broker at Grubb & Ellis | BRE Commercial in San Diego, said sale-leasebacks are likely to become more popular this year as companies look at their options for investing capital in their businesses during an economic slowdown. "Because the economy has taken a little bit of a downturn, they'll look to take money out of their real estate," Roberts said. He was one of four brokers representing Citibank in the sale of
CoreNet Global, an association for corporate real estate executives, reported last year that sale-leasebacks are growing in popularity as corporations look to reduce their property ownership and increase their flexibility, with a preference for selling portfolios of company-owned real estate rather than single assets in several transactions. The January 2007 CoreNet Global Experts Survey indicated that 6 percent of corporate real estate would shift from owned to leased property over the next five years, representing $72 billion worth of real estate. Since the survey results were released last year, Eric Bowles, vice president of CoreNet Global in Atlanta, said there is an urgency to sale-leasebacks that wasn't apparent a year ago, because companies that are looking for new sources of capital for their business operations have found the financial markets in a state of disarray. And as they look to their real estate, corporations are also finding that there isn't the same amount of capital to finance sale-leaseback transactions and guarantee the best possible price as there was two years ago. "We have companies saying they'd like to consider it, but it's really difficult to do," Bowles said. He said sale-leaseback strategies work best when companies plan the sale of assets over a series of years. For instance, Bank of America and Wachovia Corp. have done a lot of business with American Financial Realty Trust, a Jenkintown, Pa.-based real estate investment trust that specializes in sale-leasebacks with financial institutions. During fourth-quarter 2007, the REIT paid Wachovia Bank N.A. $34.5 million for 31 bank branch properties totaling 154,000 square feet and four land parcels under a long-term agreement to acquire assets from Wachovia. As corporations move forward with sale-leasebacks this year, the lending constraints in the capital markets and uncertainty in the economy could make the transactions less attractive for sellers. Bowles said lenders will probably require corporations to make more commitments to long lease terms and they may impose additional requirements for companies with less than stellar credit. He predicted that there will be fewer sale-leasebacks in 2008, but he said there will be more companies working on plans this year for long-term sale-leaseback strategies. Brian Scott, senior managing director in the sale/leaseback group at CB Richard Ellis in New York, said his group is seeing a little bit more sale-leaseback activity this year, but he's not sure if the motivation of corporations to sell their real estate is tied directly to the credit markets or not. "Since the beginning of this year we've seen an increase in the number of inquiries," Scott said. "It's spread across a number of types of industries." Most of the sale-leaseback activity that he's involved with is on behalf of investment-grade companies, most of which are in the Fortune 500. "It's less a matter of them seeking alternative financing and more that they can take capital out of the property for higher yields in their core business," Scott said. In some ways, sale-leasebacks are easier to finance, because of the high credit quality of most of the tenants involved and the long-term leases that are usually included in the transactions. However, any real estate deal is more difficult to finance now than it was at this time last year, Scott noted. "When [sale-leasebacks] are being financed, they're being financed with less debt and more equity," he said. "That has a pricing implication for these transactions." Corporate Advantage
Discounted pricing may be where local investors see opportunity in the market. During a March 11 discussion of the capital markets hosted by the Urban Land Institute San Diego/Tijuana chapter at the University Club in downtown
"There is a lot of excess real estate out there," In Kenneth Rudy, leader of the corporate capital markets practice for the Americas for Jones Lang LaSalle in San Diego, said the firm's backlog of sale-leaseback business is as large as it has ever been before and growing. "In times of uncertain economic environments, companies probably more so than ever are looking to rationalize their real estate portfolio," Rudy said. Corporations want to make sure they have the best real estate for their operations as well as the best value for the dollars the companies are spending on their business. Buyers of sale-leasebacks increasingly are pursuing the transactions as value-add investments, because they can re-tenant and re-lease the space at higher rents when the corporate tenants move out, Rudy said. Miami-based United Trust Fund, a private all-cash buyer with capital from GE Real Estate and a focus on the purchase and leaseback of corporate real estate under long-term net leases, has found less competition recently and more opportunities to participate in sale-leasebacks. Paul Domb, vice president of asset management for United Trust Fund, said business has increased in each of the last five years. "The competition over the past seven years has increased a staggering amount," Domb said. "So many people entered our business and threw their hat into the sale-leaseback arena, but I would say the last six months has been the exact opposite." Tenant-in-common investment groups and 1031 exchange investors were acquiring net-leased assets and sale-leasebacks during the last few years, but the ongoing credit crunch has taken its toll on some sale-leaseback portfolio buyers who can no longer find the lending they need to acquire corporate real estate. Sellers are still finding plenty of willing buyers though among private equity firms and publicly traded REITs. Reasons to Sell
In Brian Lewitt, a senior director in Cushman & Wakefield's Los Angeles West office, has worked on several sale-leasebacks in
Lewitt recently represented Point.360, an audio and video post-production company, in a sale-leaseback near In another transaction, Lewitt is working with a group of business partners in the
In another situation, Lewitt is representing a business owner who is selling his company but holding on to its real estate for an income stream after retirement. The new business owners will lease the asset from him. Lewitt said real estate values have risen so much that some people are able to run their companies into the ground and still make money or break even because of the value tied up in the company's real estate. "If a company is struggling and they have this untapped capital in their real estate, it's a good time to sell right now," Lewitt said. "Point.360 needed to recapitalize their balance sheet and the real estate was a good way to do it." However, investors are reporting that the capitalization rates for sale-leasebacks are rising, the prices per square foot are going down and the amount of money investors have to put down in terms of equity is rising. For sellers, Roberts said the downside is that lenders are looking closely at the credit of the company selling and later leasing the real estate. Sellers may have to provide a personal guarantee on the lease terms to move sale-leasebacks forward. - E-mail Mandy_Jackson@DailyJournal.com |
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