Tight equity market boosts sale/leasebacks.

Tight equity markets in the first half of 2001 are forcing corporations to seek new sources of capital, and many are finding it in an unexpected place: in the form of real property right on their balance sheets. To help corporations take advantage of real property equity, major real estate companies like Time Equities, Inc. are purchasing owner-occupied property from corporations in complex transactions that also incorporate a long-term lease to the occupant. Time Equities, for example, has completed such transactions with companies as significant as Sprint, Cole Vision and Wells Fargo, and done deals that account for over 600,000 square feet in aggregate.

Economic Drought Drives Corporate Thirst for Equity

A host of bad economic news has set the stage for the resurgence of need for these transactions. Stock prices have dropped precipitously and even recent recoveries have failed to reassure investors. The tech-dominated NASDAQ has led the decline in the public equity markets. However, practically every category of publicly traded companies other than REITs has followed. Even many Dow Jones-listed blue chips are down 15% or more from year-2000 highs.

In other areas of the economy, consumer confidence is weakening. Manufacturing inventories are up and sales are down. The big three car makers are retrenching. And unemployment, while still low, is growing.

Despite the retreat from last year's rosy economic picture, prospects are not uniformly dim. Real estate values, home sales and new home starts are all strong or rising, with the residential market receiving a dramatic boost from the Federal Reserve's Open Market Board's efforts to fuel a recovery with low interest rates.

The light at the end of the economic tunnel isn't bright enough, however, to illuminate new sources of equity for corporations facing a cash shortage. Whether they desire to develop new products, extend their business operations, grab at additional market share, acquire weaker competitors, boost marketing expenditures or simply ride out the rough spots, U.S. corporations have seen their traditional sources of equity dry up in the first quarter of 2001.

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Spells Relief

Many corporations thirsty for new pools of equity to tap are surprised to find the solution right on their own balance sheets. In the heady 1990s many corporations acquired, real property, from their own headquarters buildings, to plants and factories, distribution and service centers and facilities in other outlying locations. While revenue and profits were growing by 10%, 15% or even 50% annually, corporations from Sun Systems to Sprint allowed real property, and the equity that entails, to accumulate on their balance sheets.

Today, there is no reason for a company to own real estate unless real estate is its core business. Equity tied up in real property could be put to better use. And, as non-performing equity it actually acts as a drag on a company's performance.

The easiest and least disruptive way to reclaim that cash for better uses is a sale/leaseback transaction. This apparently complex transaction can actually be quite simple to perform. In its essence, the real property is sold to a company whose core business is real estate -- freeing up equity for the prior owner. As a condition of the sale, the prior owner and occupant agrees to a long-term lease of the property. This guarantees a stable, predictable cash flow for the new owner.

In recent months, for example, some of the first rate corporate names with which Time Equities has completed sale/leaseback transactions include Sprint in Rancho Cordova, Calif.; Cole Vision in Twinsburg, Ohio; Wells Fargo in Road Hillsboro, Ore.; Tektronix 74 Vernier Software in Portland, Ore; and Sitel Corporation in Omaha, Neb. Our most recent sale/leaseback transactions have an aggregate value of over $50 million, and account for over 600,000 SF in aggregate.

Key to protecting the real estate company in sale/leaseback transactions is the long term lease with the corporate tenant, which is also the seller. In our transaction with Cole Vision --the nation's largest eye care company, owner of Pearle Vision and of Things Remembered gift stores-- we negotiated an 18 year lease. The real estate company, in effect, is buying a proven asset with a long-term credit tenant -- the golden grail of many conservative real estate investors.

Sale/leaseback transactions are flourishing in the current economic environment and tight equity markets. Given their advantages to both corporations and real estate service providers, they are likely to continue enjoying this success throughout 2001.