This LARG contains the following items:
Is the Edifice Complex Giving Way to the Exodus Complex?, A Tenant Checklist for Leasing Back Its Headquarters, and the Lease Clause Critique: A Collection of Headquarters Sale Leaseback Clauses.
Number of Single Spaced Pages: 12
STRATEGIES FOR SELLING THE CORPORATE HEADQUARTERS
This LARG focuses on the sale and leaseback of corporate headquarters. The first section looks at some recent deals, and outlines certain characteristics present in today's transactions. The second part is a tenant checklist which contains several important issues unique to the leaseback part of the bargain. Finally, the Lease Clause Critique features a sampler of lease provisions applicable to a leaseback of a corporate headquarters where the company leases back only part of its pre-sale space. Signage and building name issues, assignments to affiliates, and rights of first offer for expansion space for the seller-tenant are covered.
Is the Edifice Complex Giving Way to the Exodus Complex?
From the 1960's through the 1980's, many an American corporate giant built a grand headquarters building to use as its home. Corporate wags referred to this desire for sumptuous business accommodations as the "edifice complex"—a play on words taken from the domain of Sigmund Freud. However, during the lean 1990's, many Fortune 1000 companies are dumping those grand palaces, or selling them and leasing them back. The motivation? To raise cash, book earnings, or dispose of excess office space.
On the Block
Take a look at the following deals where a company had made or proposed an exodus from its corporate real estate:
- Bell Atlantic, the baby bell serving the mid-Atlantic region of the country, contracted to sell its 51 story headquarters building in Philadelphia to a joint venture formed by Dana Corp. and Textron Inc. Bell Atlantic agreed to lease back the office tower for a minimum term of 20 years, to retain ownership of the land, and to continue to manage the building.
- Chevron Corporation said it wants to sell its 22 story headquarters in San Francisco, which has been its corporate home for 71 years. The company plans to consolidate its headquarters operations in one of the buildings it owns on Market Street in San Francisco after vacating the 572,00 square foot building located at 225 Bush Street. In 1992, Chevron cut more than 6,000 jobs as part of a restructuring. During the 1980's, Chevron had as many as 8,000 employees in San Francisco—today it has around 2,000. The largest concentration of Chevron workers (about 2,800) is now located in the company's suburban office park in San Ramon, California.
- American Telephone and Telegraph Co. made a deal to vacate its corporate headquarters on Madison Avenue in New York City, and lease the building to Sony Music for 20 years with an option for Sony to buy the building. To do the deal, AT&T must relocate about 1,000 AT&T employees to another AT&T building located on the Avenue of the Americas in lower Manhattan.
- The Sun Company recently announced that its subsidiary, Radnor Corporation, had reached an agreement to sell seven of its office building complexes to Atlantic American Properties for $200 million in cash. 16 office buildings containing 2.2 million square feet are involved in the proposed sale. The properties are located in Pennsylvania, North Carolina, Atlanta, and Tempe, Arizona.
- Ultimate Corp., a software and network management firm, cut its $17.3 million debt to Chase Manhattan Bank by transferring its real estate to the lender. The deal included a sale leaseback of the company's headquarters in East Hanover, New Jersey.
- IBM has indicated that it would consider selling its headquarters in Armonk, New York if the price is right. IBM has been cutting costs, employees, and office space aggressively as part of an ongoing restructuring effort. The company is expected to unload at least 5 million square feet of corporate real estate.
- Chemical Bank's merger with Manufacturers Hanover Trust has resulted in a dramatic reduction of the office space occupied by the two institutions prior to their marriage, and most of the surplus space is located in Manhattan. Before the merger, each bank occupied about 4 million square feet of space, either leased or owned, in the New York area. In 1995, at the end of a long term space consolidation effort following the merger, the bank will occupy a total of 6.5 million square feet; 5.5 million square feet of that is in Manhattan.
Sorting Through the Deals
Most of the sale leaseback deals today tend to fall into one of the categories which follow, although in some cases sale leasebacks take a hybrid form. The most common scenarios in today's market for the sale leaseback of a corporate headquarters include:
The Finance Sale. A finance sale is one where the seller-tenant sells its headquarters complex to a buyer-landlord and leases the complex back on a long term basis. Generally, in this type of deal:
- the seller-tenant has solid financial strength, and the tenant's strong credit supports the lease under which the seller-tenant retains control or occupancy of the complex;
- the term of the leaseback is substantial, usually at least 20 years;
- the leaseback contains sophisticated rental adjustment mechanisms to protect the buyer-landlord from inflation during the initial term and during any renewal options;
- the leaseback has no pro-tenant rights of termination, absent those in traditional casualty or condemnation clauses;
- the tenant often can book a gain on the sale which it can post as earnings;
- the tenant often walks away from the sale with a large sum of cash;
- sometimes the seller-tenant retains the right to manage the property, even if it is no longer the sole user after the sale leaseback; and
- when the seller-tenant doesn't occupy the entire complex pursuant to the leaseback, it often has expansion options, rights of first refusal, or rights of first offer covering the portion of the complex occupied by third party tenants.
Downsizing or Merger Deals. The sale of a headquarters building or buildings as part of a corporate restructuring or merger sometimes is part of a dramatic reduction of space occupied by the company. Such sales:
- often follow substantial job cuts by the company;
are sometimes made to dispose of surplus office space relating to operations which have been eliminated or "outplaced";
- may not include a leaseback of all or part of the space involved—in many cases the headquarters is moved and consolidated in another location owned or leased by the company; and
- can result from corporate mergers, where two separate headquarters operations are consolidated, and several parallel staff functions are combined.
Creditor Deals. When a company's fortunes decline precipitously, the buyer of the company's corporate headquarters can turn out to be the company's lead lender. Such creditor deals:
- frequently result from the company's default of loan covenants for its business financing;
- result in reduced debt service expense for the company, which is often strapped for cash; generally include a leaseback of at least a part of the headquarters complex by the company; and
- eliminate all or a healthy portion of the company's debt.
End of Excerpt