
Cushman & Wakefield assisted LogoAthletic in the sale/leaseback of a 118,000-square-foot manufacturing facility in Mattapoisett, with the Bornstein Cos. acquiring 5 Industrial Drive for $1.7 million and LogoAthletic agreeing to remain a long-term tenant after selling the property.
Is it time to get back to sale/leaseback? When it comes to corporate real estate, that may be the case.
After a brief, but extensive, dalliance with such questionable concepts as the synthetic lease, corporations are apparently embracing the more accepted practice of selling their real estate assets outright to an investor and subsequently leasing back all or a portion of the property. According to industry observers, it is part of an overall movement among companies to distance themselves from real estate ownership in general, either to instill confidence in their accounting practices or simply acquit their firm of dealing with the daily headaches of real estate operations.
“It’s an absolute trend,” said Cushman & Wakefield Senior Director J.P. Plunkett. “Any user that owns their real estate is at least thinking about a sale/leaseback today.”
In one recent instance, Cushman & Wakefield assisted LogoAthletic in the sale/leaseback of a 118,000-square-foot manufacturing facility in Mattapoisett, with the Bornstein Cos. acquiring 5 Industrial Drive for $1.7 million and LogoAthletic agreeing to remain a long-term tenant in the property.
Other recent pacts include Infogrames USA, which sold 50 Dunham Road in Beverly to East-West Enterprises for $8.5 million, then leased 55,000 square feet in a long-term deal at the 105,000-square-foot building. As in many cases, Infogrames had inherited the property as part of an acquisition, in its case of the Hasbro Corp. The deal was negotiated by Robert Cronin of Meredith & Grew.
Cushman & Wakefield New England President Robert E. Griffin Jr. acknowledged that more companies are looking to sell their facilities, and often will accommodate the investor by leasing a portion of the building. That aspect is important, he said, particularly at a time when investors are either unwilling to commit the needed equity or unable to secure financing for a completely vacant or substantially empty property. The owners are motivated for a variety of reasons, Plunkett said, but many are simply interested in concentrating on their own core business.
“I think corporate real estate owners are finding that real estate is a business unto itself, and a tough one at that,” Plunkett said. “Whether the product is software or selling widgets, they would rather do that 24/7 than worry about their real estate … That’s a big reason for what we’re seeing.”
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Trammell Crow Co. also anticipates an increase in corporate selling of assets, said James C. Ricker, who oversees the company’s outsourcing division. Ricker said his firm is already helping many clients evaluate their real estate portfolios and determine what is the best strategy going forward. “We have a number of requests to help clients evaluate their portfolio right now,” said Ricker, adding that the assessment could result in the client abandoning a facility completely, but doing a sale/leaseback if that makes more sense.
In some instances, companies are selling their properties as a way of quickly raising cash. That was the last-gap strategy earlier this year when struggling Ames Department Stores did a $25 million sale/leaseback of several stores with Kimco Realty Corp., while financially ailing Harvard Pilgrim Health Care has used that approach to help it through a difficult fiscal stretch as well. The health maintenance organization recently disposed of four medical buildings in one sale/leaseback, and structured a similar arrangement in an $80 million deal for one of its health centers, completing that agreement through the Massachusetts Health and Educational Facilities Authority.
“A sale/leaseback is often a way to raise money fast,” acknowledged CB Richard Ellis/Whittier Partners principal Gary J. Lemire, but he added that a more contemporary reason might be the ongoing accounting scandals rocking the country. While not as prevalent in Massachusetts as in other markets such as California, the so-called synthetic lease became a darling of corporate accounting in recent years, offering companies an arrangement that allowed them to exclude the lease arrangement from its balance sheet while being treated on its tax return as a financing arrangement.
Particularly in the wake of the Enron scandal and other corporate accounting problems, many firms have rushed to alter the estimated $50 billion of synthetic leases that have been written during the past five years. Changes pending before the federal Financial Accounting Standards Board could dramatically dilute the benefits of synthetic leases, or restrict them in many instances. In some cases, the synthetic treatment will simply be placed back on the balance sheet, while in others companies will refinance with other forms of capital. But a substantial portion is expected to be resolved via structuring a sale/leaseback agreement.
“Wall Street doesn’t like to see real estate [on a company’s] balance sheet,” said Lemire. “Corporations are just not [given incentives] to own real estate.”
But while Lemire said he does believe the synthetic leases will lead to more sale/leasebacks and concurred there will likely be more instances of users selling their properties, he added that commercial real estate remains predominantly owned by investors, estimating that just 10 percent of commercial properties are controlled by the corporate entities that occupy them. “I don’t think it’s going to be that big,” said Lemire, noting that local firms such as EMC Corp. and Gillette have expressed a desire to retain their real estate ownership positions.