RCA in the commercial property press:

After the Downturn: New Realities and Opportunities for Commercial Property Tenants

Chief Financial Officer Magazine reports: With vacancy rates for commercial real estate approaching historically-high levels and lease expirations marching on as ever, Russ Banham of Chief Financial Officer (CFO) Magazine recently described the implications – both benefits and downsides – for both owners and occupiers of commercial space. The largest take away was that, “the weak commercial real estate market presents opportunities for significant savings” for occupants who are looking either for a cheaper lease on their current space or to upgrade to a better or more visible space. However, to dispel some uncertainty around their revenues, commercial space owners and operators have begun asking tenants to sign longer leases in exchange for the lower price-per-pound they offer.

In that same vein, another growing trend that Mr Banham detailed in his article was a surge in sale-leaseback, or triple-net sale-leaseback arrangements. These occur when “a company sells the building it owns and occupies to an investor, then leases it back on a long-term basis,” thereby freeing up the structural capital to for reinvestment or payment of existing debts. With debt capital tight and a potential shift in applicative accounting rules pending, this is a smart move for many companies that currently own their brick-and-mortar spaces. According to Real Capital Analytics’ founder and president Bob White, “Generally, the yield on triple-net properties is 50 basis points or more above the equivalent unsecured debt of a company. This makes the scenario an effective form of financing. As for sellers, the can often get more proceeds via a sale-leaseback as opposed to issuing other debt.”

The potential accounting changes proposed by the Financial Accounting Standards Board and the International Accounting Standards Board would affect how companies report their lease expenses: both professional entities recommend that tenants “be required to place the obligation to pay rent over the entire lease term on their balance sheets as a liability.” Of this shift, Mr White stated that, “…the longer the lease, the greater the liability, so companies may want shorter leases than the typical 10-to-20-year term that makes sale-leasebacks work. It comes down to a financial decision: if you can borrow unsecured debt cheaper than what a real estate investor is offering, you may pass."

Articles related to this topic:

 CB Richard Ellis Leads 2010's Surge in CRE Activity
 Year-End Reporting Confirms Resurgent US Property Market
 Strong Year-End Sales Set Stage for Commercial Property Markets in 2011
 Missed Dr Chandan on CNBC? Watch Him Describe the Rebound in CRE Here
 The Return of CMBS – A CRE Bond Market Revival
 Improvements in CRE Markets Driving Banks to Work Out Legacy Distress
 Improved Pricing Knocks Distressed Owners Off Top 2010 Sellers List
 A Tempered View of CRE as Recovery Gains Traction

Posted by: Nina Turner

<< Prev

Next >>