Corporate Real Estate Newspaper Headlines

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Corporate Real Estate - Newspaper Headlines

• September 15, 1988 LA Times
• LA real estate developer offers NWA (Northwest
  Airlines) 200 million cash for 50,000 sq. ft.
  building in Tokyo used to house airline
  employees. NWA has owned to property for more
  than 30 years.
• January 24, 1989 Wall Street Journal
• Investment bankers are searching for firms owning
  Japanese real estate. NWA is listed among other
  firms as having significant real estate (worth as
  much as 400 million).
• March 29, 1989 LA Times
• NWA received buyout offer, stock price rises
  15.8 (to 71.375)

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Corporate Real Estate - Newspaper Headlines

• March 31, 1989 LA Times
• Marvin Davis offers 2.6 billion for NWA (90 /
  share). Notes Japanese real estate worth
  approximately 300 million which could be sold to
  finance buyout. (Stock price closes at 84.875)
• June 25, 1989 The Washington Post
• NWA accepts 3.64 billion acquisition offer.
  Article reports that NWA owns 5 pieces of
  property in Tokyo including a residential
  compound purchased in the 1950s and a 212-room
  hotel located 15 minutes from Narita (1 hour from
  city). Real estate reportedly worth over half a
  billion dollars.

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Overhead Set 10 Thinking About Corporate Real
Estate Decision Making

• I. Real Estate as a specialized input to
  production, not an investment in another line of
  business
  
• A. Factors affecting the decision to own or lease
  for a long term
  
• 1. Asset-liability duration match quality
• a. Life cycle of firms product--probably has
  been decreasing in length over time
  
• 2. Liquidity of committed capital
• a. Cost and ease of selling/subletting
• 3. Yield on committed capital relative to firms
  true cost of capital
  
• a. examine yield to landlord if space were
  leased compare to internal hurdle rates
  
• 4. Management Costs
• a. including distracting management from from
  core businesses

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Corporate Real Estate

• II. Firms Should Obtain Operating Facilities at
  Lowest Long-Term Cost
  
• A. Facility needs dictated by usual factors
• 1. Usage intensity
• 2. Growth prospects
• 3. Corporate image
• 4. Product availability (of space)

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Corporate Real Estate

• Decisions To Consider
• Should your firm lease/own property short or long
  term?
  
• Should your firm rent or buy?

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Corporate Real Estate

• B. The sometimes false allure of the cost savings
  of long-term leases or ownership
  
• 1. If competitive environment is changing
  rapidly, valuable capital is tied up major cost
  of any long-term commitment is lost return
  arbitrage opportunities
• 2. The flexibility of short-term leases often is
  incorrectly valued in financial analyses
  
• a. There always is a flexibility premium in that
  discounts are greater on LT leases
  
• b. i.e., the rent per square foot is less on a 15
  year lease than a five year lease hence, simple
  comparison of the rental costs of three 5-year
  leases versus one 15-year lease will always show
  the long-term lease is less costly
• c. correct analysis recognizes probabilities of
  leaving space over time and costs of subletting
  (see attached spreadsheet example)
  
• d. should think of problem as MA exercise in
  which consolidating merger occurs with some
  positive probability in any given year

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Corporate Real Estate

• III. Understanding the Benefits of Shorter Leases
  and Buyout/Penalty Clauses
  
• A. Goal should be to obtain benefit of lower
  long-term rental rate at price of sharing upside
  value in the event you want to get out of lease
  
• 1. e.g., structure lease with long-term rental
  rate, but with renewal options and stiff
  cancellation fees
  
• 2. cancellation typically will arise when you
  have opportunity to redeploy capital profitably
  
  
• must be willing to share some of the upside from
  that redeployment with your landlord--
  
• that is the price of flexibility and it should
  be easiest to pay at this time

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Corporate Real Estate

• IV. Making Ownership Commitments
• A. Factors leading to ownership
• 1. Realistic return expectations exceed your cost
  of capital (remember that real estate is a
  specialized production input for most firms, not
  a distinct line of business)
• 2. Underdeveloped local market
• a. ownership may be the only viable option in
  Baku
  
• 3. Idiosyncratic facilities are required
• a. e.g., specialized production sites in the
  computer chip businesses companies such as Intel
  need absolute control of the site to maintain
  cleanliness for chip production

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Corporate Real Estate

• V. Strategically Liquefying Current Owned
  Properties
  
• A. Obtaining matching debt financing--off-balance
  sheet and nonrecourse if possible (usually, it is
  not feasible)
  
• B. Sell properties outright
• 1. Includes option of swapping properties for
  shares of REITs or partnership units of UPREITs

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• C. Tax-free spinoffs to shareholders
• 1. Legally cumbersome, but option should be
  examined in each case
  
• 2. Requirements
• a. Firm must be in the business they are spinning
  off
  
• 1. i.e., need to have sublet space before or
  provided advisory services should set up
  operations to permit this
  
• b. Maximizing shareholder value is not a valid
  reason under the tax law, so you need a strategic
  business reason
  
• c. Must pass through at least 80 of any gain to
  shareholders thus, firm cannot retain a
  substantial portion of the value of the spinoff

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Corporate Real Estate

• VI. What if the non-real estate firm wants to
  invest in real estate for strategic reasons
  (i.e., the investment is in a separate line of
  business and is not being made to purchase a
  specialized input into the production process)?
• A. Examine other ways to invest
• 1. Traded equity
• 2. Traded debt
• 3. Opportunity funds as a principal
• B. Firms capital will be appropriately priced in
  this case (although appropriate discount rate for
  NPV calculation purposes will be a real estate
  industry rate in this case in which shareholders
  have provided money to the firm to invest in real
  properties)