An increasing number of Orange County businesses that own their industrial properties are getting out of the real estate-ownership
business.
Sale-leaseback deals, where an owner sells its building and then leases that space back from the buyer, are by most accounts thriving locally.
While often geared to smaller properties, sale-leaseback deals have accounted for some of the more prominent industrial sales here in the past year.
Notable transactions include a $27 million sale in Buena Park for Amcor Sunclipse North America’s local operations last summer, and a $29 million deal in Anaheim for furniture importer Galleria Inc. in 2006.
The first big OC acquisition for Irvine’s Bixby Land Co. of late was a sale-leaseback deal. A year ago it bought a 61,622-square-foot industrial building in Lake Forest that’s home to General Monitors Inc., a maker of instruments to detect hazardous flames, gases and vapors. General Monitors signed a 10-year lease for the building in the transaction.
Even the recent sale of 61 acres of Anaheim land and buildings by Boeing Co. to Panattoni Development Co. and financial partner ING Clarion Partners LLC,the biggest sale of OC industrial land in years,is expected to include a leaseback component for some of properties trading hands.
The trend is likely to continue, said Gary Stache, executive vice president for CB Richard Ellis’ investment properties division, based in Newport Beach. Capitalization rates remain low, and OC’s industrial market has remained relatively unfazed by troubles in the credit market,a good combination for both buyers and sellers, he says.
“This market is about as good a market can be, it’s the ideal time,” Stache said. “We’re seeing historically low cap rates. And the lower the cap rate, the lower the leaseback rate. (Current owners) can get the best of both worlds.”
Stache’s investment group has been involved in about $343 million worth of sale-leaseback transactions in the past 18 months, totaling
nearly 3 million square feet of space across Southern California. About half of those deals were in OC.
Transactions have run from a $3 million sale for a 20,000-square-feet building in Garden Grove to a $63 million sale of a 734,000-square-foot industrial facility in Rialto.
What Investors Want
Among recent local deals, his group was involved in the sale of a 38,200-square-foot Costa Mesa warehouse that holds Steffanino’s Inc., an art and framing company.
The building was sold last fall by Steffanino’s owner Steve Polito for $8.3 million, or $218 per square foot, and at a 5.5% capitalization rate. The buyer was Seattle-based Sebco Inc.
“The deal was a smart move, it helped us with capitalization. We had all this equity in the building,” said Polito, who has been in the Costa Mesa facility for close to 13 years, and owned the building for about five years.
The deal allows Steffanino’s to expand its import business, while shielding the company,which provides products to homebuilders’ model homes,from the downturn in the residential real estate market, he said.
Polito says the deal includes a 10-year lease.
“We don’t plan to move,” he said.
Buyers for properties under $10 million tend to be private capital investors, while larger deals are split between private capital and institutional investors, Stache said.
A few national firms, including United Trust Fund Inc. in Miami and Los Angeles’ Century Park Partners LLC, specialize in buying these types of properties.
“Generally they’re not the high bidder, though,” Stache said.
For larger-sized industrial deals, the volume of sale-leaseback deals “has been pretty consistent,” said Bob O’Neill, investment officer for the Irvine office of Chicago-based First Industrial Realty Trust Inc.
That said, “I expect we’re going to see more deals (in the future),” especially with a changing economic climate, O’Neill said.
First Industrial was behind one of the biggest sale-leaseback deals in OC last year, a $26.6 million buy of a 291,000-square-foot manufacturing and distribution center in Buena Park.
The real estate investment trust bought the property in August from Amcor Sunclipse North America, a nationwide distribution company that’s part of Australia’s Amcor Ltd. The building serves as Amcor Sunclipse’s North American headquarters.
It was the second local sale from Amcor in recent years. In 2005, it sold a Fullerton property it owned for $17 million.
Not Core Business
In Amcor’s case, like “a lot of corporations, owning real estate is not a part of their core operations,” O’Neill said. And despite the run-up in land prices, it’s often more profitable for a business to shed properties and lease the space back, he said.
Industrial real estate has been appreciating 8% to 10% per year. While that’s a good return, if a business sells the building they own, and puts the profits into their business, it’s possible for businesses to get returns in the 18% to 30% range, O’Neill said.
Reasons behind sale-leaseback deals vary, Stache said. Some companies are looking to expand, and don’t think real estate is a productive use of their capital.
Others business owners might be looking to pay down debt or see their buildings as a quick way to raise cash during a tough market.
Talking to local businesses, Stache says the best time for an owner to start considering a sale is when a five- or 10-year plan for a company’s future is being considered.
“Many owners also own their own real estate. Their exit strategy (normally) might be to sell both the business and the real estate at the same time. But that leaves a lot of money on the table,” he said.
What business owners should do, Stache says, is sell the real estate early, independent of an outright sale (or relocation) of the company, and lease it back prior to cashing out on the business. That will maximize their returns.
The longer the term of the lease portion of the transaction, the higher the sale price. What’s more, the business owner largely dictates the sale price of the property by picking the corresponding rent level for their company.
Some deals turn out to be more complicated.
In the case of Galleria, an importer of lawn, garden and other household products, its sale-leaseback of a 281,000-square-foot storage and distribution building, at a former campus of Minneapolis-based Medtronic Inc., proved to be short-lived.
Galleria bought the Anaheim property in 2002, for a reported $20 million. In June 2006, it sold the property to Irvine’s Sares-Regis Group Inc., for $28.5 million, and leased it back.
This month, Sares-Regis announced it had found a new owner for the property: Galleria, which paid $38 million for its old property, or about $136 per square foot.
Galleria used the money from the original sale to finance some additional warehouse buys in Southern California. Subsequent sales of buildings are believed to have freed up enough cash for the company to buy back the Anaheim warehouse.
