hidden potential of your occupancy costs: how jll’s corporate finance team can help
TRANSCRIPT
Driving Value
2
Determinants of Corporate Real Estate Value
Lease Terms and Conditions
Lease Term
Rent Escalations
Corporate Guarantee
Master vs. Individual Leases
Structural Obligation
Early Termination
ROFO/ROFR
Assignment/Subleasing
Lease Term
Rent Escalations
Corporate Guarantee
Master vs. Individual Leases
Structural Obligation
Early Termination
ROFO/ROFR
Assignment/Subleasing
202015 years15 years 202015 years15 years
FixedFixedCPICPI FixedFixedCPICPI
YesYesNoNo YesYesNoNo
Master LeaseMaster LeaseIndividual LeaseIndividual Lease Master LeaseMaster LeaseIndividual LeaseIndividual Lease
BondableBondableNNNNNN BondableBondableNNNNNN
NoNoYesYes NoNoYesYes
NoneNoneYesYes NoneNoneYesYes
NoneNoneTenant ControlledTenant Controlled NoneNoneTenant ControlledTenant Controlled
Minimizes ValueMinimizes Value Maximizes ValueMaximizes Value
Lease Terms and Conditions
Lease Term
Rent Escalations
Corporate Guarantee
Master vs. Individual Leases
Structural Obligation
Early Termination
ROFO/ROFR
Assignment/Subleasing
Lease Term
Rent Escalations
Corporate Guarantee
Master vs. Individual Leases
Structural Obligation
Early Termination
ROFO/ROFR
Assignment/Subleasing
202015 years15 years 202015 years15 years
FixedFixedCPICPI FixedFixedCPICPI
YesYesNoNo YesYesNoNo
Master LeaseMaster LeaseIndividual LeaseIndividual Lease Master LeaseMaster LeaseIndividual LeaseIndividual Lease
BondableBondableNNNNNN BondableBondableNNNNNN
NoNoYesYes NoNoYesYes
NoneNoneYesYes NoneNoneYesYes
NoneNoneTenant ControlledTenant Controlled NoneNoneTenant ControlledTenant Controlled
Minimizes ValueMinimizes Value Maximizes ValueMaximizes Value
Lease Structure Gross Bondable
Purchase Option Yes No
HIGHEST CAP RATE LOWEST CAP RATE
Location
Property Condition
Lease Term
Tenant Credit
Property Class
25 years 0 years
Investment-Grade Speculative
Class C Class A
Tertiary Market Primary Market
Poor Excellent
Value Deterrents Positive Value Drivers
Lower Your Occupancy Costs The Right Tool, The Right Opportunity, The Right Investor
Tool Lease Term Lease Rent Credit
Worthiness
Balance
Sheet
Vacancy Discount
Rate
Acquisition
Long-Term Sale
Leaseback
Acquisition Sale
Leaseback
Lease Buy Down
Tenant Led Build-
to-Suit
Short-Term Sale
Leaseback
Deal Packaging
Identifying your company’s leverage points can help determine which capital markets
tools can help tap into hidden value in your real estate portfolio.
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Potential to acquire at low basis
Absolute control over property
Reset depreciation of Leasehold Improvements
Cease costly rental obligations
NPV benefits if low cost of capital
Points of Leverage
Lease Term Lease Rate Credit
Worthiness Balance Sheet Vacancy Discount Rate
Short Remaining
Lease Term Excess Capital
Low Discount
Rate
Acquisition Purchase a currently leased asset
Considerations Benefits
Asset goes on balance sheet
Debt goes on balance sheet
Not always most efficient use of capital
Potential for losses if company no longer needs
building in the future (residual risk)
4
$21.4 Million Purchase Price
$200K NPV Benefit
$700K Annual Earnings Benefit
Acquisition Purchase a currently leased asset
Client Situation
$1.1 Million Annual Cost Savings
While each acquisition is different, a
recent acquisition yielded significant
savings for our client. The
transaction contemplated a 100K SF
asset with a net rent of $15 psf
purchased at a 7.00% cap rate.
The client expected to use the
building for 15+ years and had a
discount rate of 5.00%
Financial Impact
5
Points of Leverage
Lease Term Lease Rate Credit
Worthiness Balance Sheet Vacancy Discount Rate
Can Accept Long
Term
Investment
Grade
High Discount
Rate
Long Term Sale Leaseback Sell property for upfront proceeds, but retain long-term control
Preserve capital
Monetize asset to generate capital and redeploy
Remove assets from balance sheet
Structured to meet key objectives
Enhance occupancy flexibility
Transfer residual risk exposure
Considerations Benefits
Credit and lease term drive pricing
EBITDA Impact
NPV benefits greatest for companies with high
cost of capital
Strategic nature of asset
Need for future capital improvements
6
Earnings Neutral Transaction
Alleviate Residual Risk
$18 Million Day 1 Net Proceeds
$3.1 Million NPV Benefit
Long Term Sale Leaseback Sell property for upfront proceeds, but retain long-term control
Clients executing long term sale
leasebacks include Walgreens, Citi,
EDMC, and AT&T, among others.
Cap Rates on these types of
transactions are at historic lows,
making now an ideal time for
corporate occupiers to consider this
strategy
This example considers a 100K SF
asset leased for 15 years at a net
rent of $15 psf.
The client had a discount rate of
10.00%, an annual depreciation
expense of $5.33 psf and re-
deployed the proceeds at a 5.00%
return.
Client Situation Financial Impact
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Points of Leverage
Lease Term Lease Rate Credit
Worthiness Balance Sheet Vacancy Discount Rate
Has Short Term,
Can Do Long
Term
Investment
Grade
High Cost of
Capital
Acquisition Sale Leaseback Purchase a currently leased asset and perform a sale leaseback, taking advantage of cap rate arbitrage
Potential to acquire at low basis
Generate upfront proceeds or lower long term
occupancy costs by utilizing cap rate arbitrage
Choose new landlord
Utilize credit to drive down rent
Utilize credit to increase cash
Considerations Benefits
Prevents title from passing to tenant
Sale leaseback generally performed “off-market”
Less likely to receive tenant improvement
allowance than standard lease extension
Option to sell leasehold improvements
8
Better Lease / New Landlord
$400K Annual Earnings Benefit
$6.0 Million NPV Benefit
Purchase Price = Sale Price
Acquisition Sale Leaseback Purchase a currently leased asset and perform a sale leaseback, taking advantage of cap rate arbitrage
JLL recently executed an acquisition
sale leaseback for a client seeking to
enter into a new lease with a new
landlord, and also monetize
significant leasehold improvements
110 K SF facility highly specialized
for client’s use
8.00% client discount rate
Significant financial benefits were
realized through the monetization of
leasehold improvements
Client Situation Financial Impact
Monetized $28M of LH Improvements
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Points of Leverage
Lease Term Lease Rate Credit
Worthiness Balance Sheet Vacancy Discount Rate
Above Market Speculative
Credit
Excess
Capital
Low Discount
Rate
Lease Buy Down Buy down the remaining rental obligation in an existing lease
Reduce rental cost to market rate
Hedge against the risk of a future impairment if the
facility becomes surplus
Decrease carrying cost of lease space in order to
facilitate subleasing at market
Deploy capital
Considerations Benefits
Utilize available, low-cost company capital to buy-
down an existing lease obligations where the
landlord’s return expectation is higher than the
company’s cost of capital
Buy Down payment against taxable income
Requires cash upfront which may increase
company debt
10
70.24 PSF Buy Down Payment
$28 PSF Earnings Benefit (10 years)
$6.91 PSF NPV Benefit
Reduced Rent $10 psf annually
Lease Buy Down Buy down the remaining rental obligation in an existing lease
The client in this example had sub-
investment grade credit but cash
available to deploy
8.75% discount rate
10 years of term at $20 psf
The rent was reduced $10 psf
annually
Based on an investor IRR
requirement of 7.00%, the buy down
payment was $70.24 psf
Client Situation Financial Impact
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Points of Leverage
Lease Term Lease Rate Credit
Worthiness Balance Sheet Vacancy Discount Rate
Long Term Investment
Grade
Desire to Re-size
/ Re-locate
High Discount
Rate
Tenant Led Build-to-Suit Lease (Vs Developer Led) Leverage strong company credit and relationships to achieve optimal pricing while building a new facility
New facility designed to company’s standards
Reduce operating expenses through efficiencies
Densify to modern standards / reduce sf
Ability to fund entire project cost, including Tis
Potential to receive state or local incentives
Present value savings on lease payments
Considerations Benefits
Ability to manage incentive process
Ability to manage developer
Requires long term lease
Site selection can be difficult if developer
controlled
Lease classification scrutinized by underwriters
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Points of Leverage
Lease Term Lease Rate Credit
Worthiness Balance Sheet Vacancy Discount Rate
Term will provide
higher sale price
Short Term Sale Leaseback Sell and lease a property back for less than 5 years
Generate higher sale price than vacant sale
Allows buyer to pass reduced stabilization costs to
seller through increased sale price
Minimize loss on assets where long term
occupancy is not anticipated
Maintain space flexibility
Considerations Benefits
Leaseback terms of five years or less are viewed
as a staged exit and price conservatively
Market dynamics and real estate fundamentals
effect pricing more than a long term SLB
Eye on the balance between deprecation and rent
Strategically developing a story around renewal
probability can significantly impact proceeds
13
Points of Leverage
Lease Term Lease Rate Credit
Worthiness Balance Sheet Vacancy Discount Rate
Mix of Long &
Short Flexibility
Investment
Grade
Under Utilized
Space
High Discount
Rate
Deal Packaging Enhance pricing and mitigate GAAP losses by packaging low yield plays with high yield plays
Generates sale proceeds and allows redeployment
of capital into core competencies
Control over allocations of gains and losses
Allows for disposition of unwanted space while
minimizing upfront GAAP losses
Right-size portfolio space, lower occupancy costs
Considerations Benefits
Need to sell dominant share of long term assets
to offset vacant and short term asset losses
Can be structured in a variety of ways to fit the
company’s needs and optimize the portfolio as a
whole
Individual property sale value must be at fair
market value
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© Copyright 2014 Jones Lang LaSalle
The full presentation includes updates on the
capital markets environment, additional financial
examples, further financial example detail, and
tips on how to identify opportunities to create
value in your real estate portfolio.
To View the Complete Presentation
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Bruce Westwood-Booth
Managing Director – Corporate Finance
Chicago, IL
+1 (312) 228-2966