Tuesday, October 6, 2009

Are 'Sale-Leasebacks' The New Black?

Sale-leasebacks seem to be dominating commercial/investment real estate news these days.

Consider the following:

- HSBC Holdings -- the parent of mortgage giant HSBC -- is selling its New York City office tower for $330 million and leasing back space there.

- Retailer Tesco, the UK behemoth that owns stores around the globe, including the U.S., is conducting sale-leasebacks of a number of its stores.

Even government is getting into the act: The state of Arizona has approved a plan to auction its “State Capitol Executive Tower” in a 20 year sale-leaseback. The tower houses the offices of the secretary of state, state treasurer and governor and has an estimated value of $40 million. Why? The state's current budget shortfall, approximately $3.2 billion. Further, California has announced it plans to sell $2 billion (or 62% of Arizona’s budget deficit) worth of government real estate in a similar sale-leaseback. GlobeStreet.com reports that the City of Alexandria, VA, is contemplating a simliar plan with a large portfolio of its properties. In the Midwest, the city of Chicago has already made some moves. Several sale-leasebacks with the Skyway toll road, downtown parking garages and downtown parking meter system for $3 billion.

For investors, sale-leasebacks can be lucrative for both sides. They make sense for governments because they allow them to get cash now to pay off their debts while retaining the option to buy back the property in 20 years or so. Buyers like them (I have investors looking for buildings that house U.S. post offices) because the renters are the government (i.e. taxpayers), a tenant with a strong credit rating. In some cases, the return can be twice what the investor pays, say Globe Street analysts.

Interestingly, news reports also say international investors are "heavily intrigued" by these sale-leasebacks. This creates a bit of an irony, says Globe Street, because in theory, "you could have a U.S. State Capitol building owned by China."


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