Does Bell Atlantic have REIT stuff?

Bell Atlantic is seriously exploring the conversion or sales of most or all of its properties to a real estate investment trust, REW has learned. If that is accomplished, part of the deal would include the lease-back of those portions that they would actually occupy.

Because it is a public utility, any such scheme, however, would first have to be approved by the Public Service Commission.

"They feel we are not in the business of owning property," said an official who asked to remain anonymous. "Besides, many of the properties are nearly empty or are in good locations and are underutilized."

The portfolio consists of 95 properties, about 25 of which are in New York City. It is already well known in New York real estate circles that the NYNEX building at 1166 Sixth Avenue is on the market through Darcy Stacom at Cushman & Wakefield, which is also said to be advising Bell Atlantic on the possible REIT conversion.

Other buildings in the city portfolio include 1095 Sixth Avenue at 42nd Street, which was the headquarters before the merger between NYNEX and Bell Atlantic; a huge garage next to the Javits Center; 441 Ninth Avenue; 240 East 38th Street; various switching stations around the city; and several huge Downtown buildings that contain switching equipment or back office space, including 140 West Street just west of Seven World Trade at Barclay Street, which local brokers say would make a "great" conversion.

Steve Marcus, a spokesperson for Bell Atlantic, denied the company has any such plans, and to avoid "speculation," would not provide a list of owned properties.

"We periodically evaluate our real estate use," he admitted, adding, "We have no plans for wholesale disposal of our assets. It's premature to speculate on what we might do with any individual buildings."

The Bell Atlantic combined company now has operations in New York, Massachusetts, Rhode Island, Maine, Vermont, Washington, D.C., Maryland, Delaware, Virginia, West Virginia, Pennsylvania and New Jersey.

Still, sources say the exploration for cash is ongoing, and the company is weighing many tax implications of ownership versus leasing, including transfer, gains and real estate taxes.

The recent merger of Bell Atlantic and NYNEX is beginning to show up in bottom line savings, and officials say they expect to save $450 million in costs this year related to the merger. It's chief financial officer. Frederic Salerno, told analysts last week it will be spending $6 billion this year on network improvements, up from earlier estimates of $5.5 billion.

While company executives "want the cash," and could just sell the properties outright, organizing them into a separate REIT or a so-called UPREIT (a partnership entity that holds the assets of the associated REIT) and then selling the stock to obtain the cash, could provide immediate tax benefits, although at some point taxes would probably be due.

"If a company puts their property into a REIT, they could do it tax free, and once they raise cash in the public market and the cash was distributed to them, unless it was somehow a return of capital, they would have to pay taxes on it," explained attorney Larry Lipson, who heads the real estate department of Proskauer Rose and was responding to a hypothetical question, unaware of the company involved.

Properties could be sold individually, or en masse to a current REIT, or any one of a number of REITs now in formation that have strong ownership and property management capabilities.

"The REIT analysts like to see the real estate management associated with the real estate," said Steven Shepsman, managing partner of the E&Y Kenneth Leventhal Real Estate Group. "They like to know the management has a track record and they want the people to work for the REIT, be familiar with the buildings, and not be third party management."

Speaking in general about the advantages of any company exploring the formation of a REIT with its properties, Shepsman says all companies not in the real estate business should be constantly evaluating their real estate ownership.

Forming a REIT has advantages, he said, in that a company would get to re-deploy a very large asset off their balance sheet and raise capital, which could then be directed towards specific needs.

"If I am a telecommunications company, I need money to invest, and having it tied up in underutilized real estate may not be advantageous," Shepsman explained.

But whether or not it would be a good idea would depend on the way the market would view the real estate, whether it has potential upside, the structuring of the new company and any new leases, and how the market and the company would handle giving up some control over the currently empty spaces.

"The utilities tend to be very protective of their mechanical properties and historically owned a lot of property because they felt they would be there forever," said Shepsman.

Sources recall that in the past, then New York Telephone engineers would always argue against letting other firms into their buildings on security grounds in particular.

But even before foreign saboteurs and bombers were a real threat, the engineers worried even more about water damage to the sensitive equipment should a fire truck be called to put out a careless tenant's wastebasket blaze.

Any of those kinds of mechanics would have to be thoroughly waterproofed and secured, they say, to now open buildings to others.

"There are plenty of corporations - not just utilities - that are looking at re-deploying their real estate. The fact a company may be looking at it is a good sign," said Shepsman. "Even if they come up with an answer of 'no,' everyone should be looking."