QUESTION: What do companies such as Northrop, Blue Cross, Dataproducts and Products Research & Chemical Corp. have in common?
ANSWER: Sale-lease-backs. Each of these companies has sold a chunk of its real estate holdings, yet continues to operate at the same locations--but as tenants.
One advantage to becoming a big company is that the business can stop paying rent and buy its own building instead. Within the last several years, however, a long list of businesses have been reversing this pattern by selling off their real estate and opting for a lease.
“It’s going to happen a lot more,” predicts Daniel E. Powell, president of CityPacific Commercial Real Estate Services.
“Especially with the demise of junk bonds,” Powell reasoned, “companies will need to look at alternative ways to raise capital.” And, he added, what better source of cash is there for a company than selling off a piece of real estate that has accelerated in value?
For most public companies, simply taking out a loan on the property doesn’t make sense.
For tax and accounting reasons, only the purchase price of a property is listed on a company’s balance sheet. So, if a property was bought for $1 million and is worth $10 million today, its still gets listed as a $1 million asset.
A $10 million loan on the property, however, shows up as a $10 million liability--so the company may look like it has more liabilities than assets if it takes out a mortgage.
A direct sale with no lease-back often requires a company to pay capital gains taxes that can eat up a third of the property’s appreciation. But with a sale-lease-back, said accountant Ron Silver, the seller can skirt such taxes.
This strategy has been most popular with single-tenant industrial buildings, added Silver, who is director of entrepreneurial services at Ernst & Young in Century City.
Managers and corporate raiders trying to facilitate a leveraged buyout of their company have also used the strategy to raise cash for their acquisition.
A prime example is Dataproducts Corp. in Woodland Hills.
Last year, DPC Acquisition Partners tried to finance a takeover of Dataproducts by agreeing in advance to sell the company’s headquarters.
The buyout fell though, but Dataproducts’ executives cut a deal to sell their land to Trizec Properties Inc. and use the money to rebuild the company while fighting off any unfriendly suitors. Trizec, in turn, secured a well-located property suitable for development in several years. In the meantime, the buyer gets a stable tenant too.
Brokers Paul Locker and Tony Maniscalchi of The Prudential Stevenson Real Estate completed the sale and lease-back of 14 small buildings in Glendale that serve as home to Products Research & Chemical Corp.
“We’ve done quite a few of these transactions in the last year,” Locker said. In his most recent deal, the sellers get to stay on as tenants for the next five years. The buyers--17 of them to be exact--buy not only the property, but time to negotiate alternative uses for the property when the lease expires.
Not everybody is convinced that sale-lease-backs have a bright future, though. Eventually, companies will realize they’ve sold out and have no place to go, said Tony Yocham, president of the Reichman Group in Newport Beach. “What happens at the end of the lease?”
“It is as if you’ve sold you’re birthright,” Yocham said. Initial lease payments may be low--but eventually a rent escalation clause cames to haunt the lessee.
As American businesses are forced to think about long-term versus merely short-term profits, he predicted, the sale-lease-back phenomenon will lose its current popularity.
--Three new tenants have signed leases with JMB/Urban Development at the soon-to-be-completed 1999 Avenue of the Stars office tower in Century City. Law firm O’Melveny & Myers has committed itself to 60,000 square feet on three floors; Act III Communications, an entertainment firm founded by Norman Lear, will occupy 41,000 square feet on two floors; and merchant bankers Wasserstein Perella Group will fill 10,000 square feet.
Additionally, First Los Angeles Bank has expanded its planned occupancy to nearly 33,000 square feet.
These most recent leases have an aggregate value of more than $70 million, with terms ranging from 10 to 15 years.
--Consumer electronics retailer Silo has leased 318,000 square feet of distribution space in Fontana’s Lincoln Industrial Center. The Staubach Co. represented Silo in its 10-year, $9.3-million lease. Coldwell Banker represented the lessor.
--Trammell Crow is nearing completion of renovation and addition work at Parkway La Mirada, a $41 million business park fronting Valley View Boulevard in La Mirada. The 24-acre site has 402,000 square feet of office, service center and retail space, including The Atrium--a four-story office building that formerly was headquarters of Denny’s International.
Trammell Crow and joint-venture partner Copley Real Estate Advisors are set to open a 51,000-square-foot office building called The Landmark in June.
In Westlake Village, Trammell Crow has bought the Olive Grove Shopping Center from Mitsui Manufacturers and is planning to convert the 8-acre site to an office center to be known as The Watercourt. The developer and joint-venture partner New England Mutual Life Insurance Co. are scheduled to reopen the center in September, after completing a $10-million rehab.
--Construction work started recently on Bentall Executive Centre--a two-phase office project at 1551 Tustin Ave. in Santa Ana. Phase I includes a 10-story, 205,000-square-foot office building and a seven-level parking structure valued at $35 million. The project is owned by Bentall/Westminister Partners, a general partnership made up of Bentall Properties Inc. of Orange and Tanasana Properties Inc., a unit of United Kingdom-based Yattendon Investment Trust. Financing is being provided by The Royal Bank of Canada.
Galperin is a Los Angeles-based free-lance writer who has covered the commercial real estate scene for several years. News releases and column inquiries should be mailed to 8306 Wilshire Blvd., No. 7078, Beverly Hills, Calif. 90211.