CHICAGO - If Daniel Reynolds, senior vice president of the capital markets group at Chicago-based Jones Lang LaSalle, were to draft a mission statement outlining an advisor's role in corporate sale-leasebacks, he would underscore one point:
"You've got to get the right people together on Day 1 to really work through the transaction - the CFO, the treasury folks, certainly the accounting folks, the legal folks and the real estate folks."
Sound simple? Think again.
Corporations frequently have conflicting agendas within their ranks, most notably at workplaces where executives are firmly entrenched. Some companies also have an emotional attachment to their real estate, which further clouds the picture.
From beginning to end, sale-leasebacks are among the most demanding businesses at Jones Lang LaSalle, according to Reynolds, who is quick to add that the real estate services behemoth has nonetheless profited handsomely from such transactions. "There are so many moving pieces with corporate clients," Reynolds said. "In many ways, when you deal with a corporation you are dealing with a many-headed monster."
Reynolds' remarks were delivered October 24, during a "Capitalizing on Corporate Sale-Leasebacks" seminar sponsored jointly by United Trust Fund of Miami and National Real Estate Investor. The event, held at the Fairmont Hotel, featured six distinguished panelists that represented a variety of disciplines, but who are all tied to the sale-leaseback arena.
Reynolds' made his presentation, "What Corporate America wants: An advisor's role in sale-leasebacks," before an audience of about 120 people, many of them brokers.
Why the hesitancy? No one disputes that the big advantage sale-leasebacks offer Corporate America is the ability to unlock the value embedded in real estate by redeploying that capital in the core businesses. It sounds like a winning proposition, so why would any corporation hesitate to take this route?
Simply stated, many corporations want both control and flexibility when it comes to their real estate needs.
"It's very difficult for corporate clients to say, `Yes, we will sign on for a 20-year lease,'" explained Reynolds. "The client may say, `OK, you've convinced me not to own the real estate. How can we be flexible with our space?' As we know, the world is different than it was five years ago. And five years from now, who is to say?"
The third quarter of 2000 proved to be a tough earnings quarter for several corporations, which ironically may have given a boost to the sale-leaseback industry. Some corporations, which not so long ago found it easy to access capital in the debt and equity markets, are now struggling to do so, making sale-leasebacks more palatable than ever, explained Reynolds.
"Now clients are calling us back saying, `Remember that presentation you made a year ago? We'd like to revisit that,'" Reynolds said. "I think the trend over the next five or 10 years is going to be companies finally getting the religion and understanding that they are not real estate companies. Investors do not buy their stocks because they own real estate. They can go buy a REIT stock if they want to own real estate."
In his role with Jones Lang LaSalle, Reynolds regularly examines a number of real estate alternatives for corporate clients, including ownership, synthetic leases, partnerships in joint ventures, short-term leases as well as corporate sale-leasebacks. If done correctly, Reynolds said, the sale-leaseback process takes months, not weeks, to complete.
"A lot of firms who are on the advisory side get so whipped up about getting a transaction closed that they don't spend time with the client to work out what the objectives are," he said.
"Are the objectives purely financial? What accounting issues are there? On the real estate side, it's certainly a question of how to control assets and retain the flexibility with your assets," Reynolds continued.
Generally speaking, Corporate America faces a constant battle of choosing between the lower-cost alternative of ownership and the control it affords them vs. the flexibility that a lease may offer, Reynolds said.
`Investors are our lifeline' Investor selection can make or break an advisor, according to Reynolds, because the investor is the linchpin in the transaction. "Your clients may look at the deal and say, `This lease rate is terrific, it's everything we wanted,'" he said. "Many times, I've had to step in and say to the client, `You have to look past the economics.' You've got to look at the credibility of the investor because, frankly, we've had investors in the past who've backed out of deals for no good reason."
The advisor not only needs to provide the client with a quantitative analysis of the transaction, but also be able to size up the investor, Reynolds told the audience.
"You really have to quantify the investor and give the client your opinion by saying, `These guys can close, they can get the deal done,'" he said.
The bottom line, Reynolds said, is that "investors are our lifeline. Without the investor community, there are no transactions. Without our reputation intact, we're not worth very much."
The tax-free exchange Tax-free exchanges under Section 1031 of the Internal Revenue Code represent a $300 billion to $500 billion market annually for the real estate industry, and it's a growing market, said Patrick Dowdall of the Atlantic Exchange Co.
"With respect to the sale-leaseback, triple-net lease market, I can summarize by saying that 1031 and triple-nets are large and growing in number and could be a much larger segment," Dowdall said.
There are basically three types of exchanges: the delayed exchange, the reverse exchange, as well as the construction exchange. The delayed exchange, which represents approximately 70% of all activity, occurs when a taxpayer sells his property and then finds a replacement property.
The reverse exchange is just the opposite: the taxpayer acquires the replacement property first before selling his property. Reverse exchanges account for 25% of all 1031 exchanges.
The construction exchange operates somewhat like a reverse exchange, but it involves some construction or renovation before the exchange is complete. The construction exchange comprises 5% of the 1031 market.
The IRS guidelines for 1031 exchanges stipulate that the replacement property must be identified within 45 days after the sale of the first property and that the replacement property must be acquired within 180 days of the sale of the relinquished property.
"What are investors looking for in a triple-net?" Dowdall asked rhetorically. "No. 1, they're looking for safety. They want a AA credit. They are looking for yield. Investors ask, `Are there any 10% cap rates out there, can I get a lease with bumps, and, by the way, can I get those with a AA credit?'"
Dowdall says that some investors are concerned that the yields on triple-net properties are neither high enough nor do they see any upside potential in many of these deals because rents tend to remain level.
- Thomas Bloodworth, managing partner, Piper Marbury Rudnick & Wolfe LLP, Dallas; "Legal Beat: An insider's look at problem-solving between buyer and seller in a sale-leaseback transaction;"
- Sidney Domb, founder and president, United Trust Fund, Miami; "The broker's role in finding the right sale-leaseback opportunity;"
- Patrick Dowdall, managing director and co-founder, Atlantic Exchange Co. LLC, Boston; "The tax-free exchange, a driving force in the market;"
- Scott Nathan, director of client management services, ATC Associates Inc., Woburn, Mass.; "Due diligence and the environmental outlook;"
- James Nolan, executive vice president and CFO, United Trust Fund, Miami; "The sale-leaseback timeline: A discussion of the current and future state of the market;"
- Daniel Reynolds, senior vice president of the Capital Markets Group, Jones Lang LaSalle, Chicago; "What Corporate America wants: An advisor's role in sale-leasebacks."