Net leasing becoming more popular

Real Estate Weekly, Nov 14, 2001 by Natalie Keith

With junk bonds and mezzanine financing becoming less viable financing options, net leasing is becoming an increasingly popular way for companies - especially those with "less-than-stellar" credit histories - to raise cash.

"In the early years we spent a lot of time educating the marketplace about net leasing," said Gordon Whiting, executive director of W.P. Carey & Co. LLC. "But now the marketplace is convinced."

Net leasing - also referred to sale-leaseback - allows firms to raise money by selling buildings they own and then leasing back the space they occupy. Companies with excess space may elect to lease back a portion of the building and make the remaining space available to another user.

This allows for "off-balance sheet" treatment of assets, which often makes a company look financially stronger and more attractive to potential lenders. In the past companies may have elected to leverage assets by taking a second mortgage on them but there are drawbacks to this method of raising money. First, it adds debt to a balance sheet and, second, banks typically lend only 60 percent of the asset's value. With a net leaseback, companies can leverage 100 percent of an asset's value, officials said.

"Real estate sits on the books at its original cost and depreciates every year," Whiting said. "This allows a company to monetize an asset to its fair market value."

Chris Hughes, principal of Praedium Group LLC, said the slowing economy has been a boon to sale-leasebacks, which have been particularly prevalent in areas like Boston and San Francisco with a high number of high tech companies. Many companies that grew at rapid rates during the late 1990s are not growing as fast and have excess space.

"They're sitting on a lot of real estate they're not using," Hughes said. "This allows them to free up capital and get rid of negative carrying charges."

Some recent example of sale leaseback transactions include Time Equities Inc.'s completion of a $8.3 million sale! leaseback of a 4-story, 120,000-SF industrial building at 47-37 Austell Place in Long Island City, Queens. The office, manufacturing and warehouse building's prior owner and only tenant is Confort & Company, an 81-year-old printing company. In selling the property, Confort also signed a 15-year lease with its new landlord.

"We're buying a quality building with a long-term tenant," said Francis Greenburger, CEO of Time Equities. "The transaction is also a plus for Confort & Company because a sale/leaseback is an effective way for corporations to do off-balance sheet financing."

Insignia/ESG was selected by EDO Corporation, New York City-based defense contractor with operations on Long Island, to arrange the sale and partial leaseback of the company's 725,000-SF property located at 455 Commack Road in Deer Park.

EDO Corporation's strategy is to sell the 725,000 SF office/industrial facility and lease back a portion of the property for its continued operations. EDO will keep approximately half of the space for its own use and make about 350,000 SF available to other users.

CRG Piermont Companies recently structured a partial sale-leaseback and acquired three New Jersey buildings from PNC Bank. The 40,000-SF office buildings with ground floor bank and retail spaces are located in Clifton, Leonia, and Secaucus. Cushman & Wakefield of New Jersey represented the seller and buyer in this transaction.

In years past, companies shied away from net leasing because the failure to own its own real estate was perceived as a weakness. But companies are seeing the benefits of these deals, which are particularly prevalent in industries that are "real estate heavy" such as fast food restaurants and other retail chains, experts said.

In its 28-year history, the number of net leasebacks completed by W.P. Carey has steadily increased. In the past six years, the volume of net leaseback transactions has more than quadrupled. In 1994, the company did $74 million in net leaseback transactions, but in 2000, that figure jumped to $415 million.

"Our growth curve has been a 45 degree line up," Whiting said. "Every year we've done more and more sale leasebacks."

As long as the economy remains soft, experts said they saw the potential for more net leasing transactions.

"It will continue for as long as the economy is slower," Hughes said.