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Corporate leasebacks on the rise

Companies finding it's easier to allow developers to maintain their buildings

D.J. Venn, left, and Stephen Sullivan of Onyx Equities.-(PHOTO BY AARON HOUSTON)

As investors in corporate real estate, executives with Onyx Equities know the value of having a high-quality, creditworthy tenant in place when the firm acquires an office building.That’s exactly what it got with the longtime headquarters of Avaya Inc. in Bernards, which it acquired from the telecom company in 2013 under a joint venture with Rubenstein Partners. As part of the deal, Avaya was downsizing but staying in place at 211 Mount Airy Road.

Onyx also got another benefit: The 282,000-square-foot building had been largely well-maintained for the past decade.

“In terms of having the building breathe on an everyday basis, they had done a lot of work over the last 10 years and invested a lot of capital,” said Stephen Sullivan, Onyx’s senior vice president of investments. “So we knew a lot of the renovations we were going to make were really more cosmetic in nature, and we weren’t going to have a huge basis creep by replacing every mechanical (system), replacing every roof, because Avaya had a done a lot of that work and heavy lifting already.”

It was an attractive deal for Onyx and Rubenstein. And it’s not the only opportunity of its kind in the state’s office market: Several other high-profile New Jersey-based companies have engaged in so-called sale-leaseback deals in recent years, seeking to shed their real estate and focus on their core business.

And experts say that’s likely to continue in a state where investors are willing to pay for older, well-located office buildings where they can add value — especially if it comes with a blue-chip tenant. That can also mean a handsome payday for the seller.

“It’s a pretty frothy market for that,” said Steven Schultz, an executive managing director with Newmark Grubb Knight Frank Capital Markets. “They’re in the business to, really, run their company, and if they can take advantage of the market today and write a lease that their operating group can afford, it’s lining up to make a lot of sense right now.”

Schultz’s Rutherford-based team has completed two partial sale-leasebacks over the past year in New Jersey, and it’s working on four others.

Such deals can take time to develop, insiders say, but they’re becoming more abundant in the Garden State. Last month, Sharp Electronics Corp. sold its Mahwah headquarters to Sitex Group for a reported $38 million, while leasing back the 147,000-square-foot building for 12 years.

That followed Bergman Real Estate Group’s acquisition of a 112,000-square-foot building in New Providence from Reed Elsevier, the publishing and information company, which is consolidating, but keeping one of its business units in the space. And Sony Corp. of America has put a 219,000-square-foot building in Park Ridge on the market, reportedly looking to lease back part of the space on a short-term basis.

RELATED: Sony sells, leases back Park Ridge office building for reported $16.8M

The opportunities appeal to developers and investors, Schultz said, because having a “partial tenant with credit” can lead to better financing terms when trying to acquire a building. That’s especially true for sale-leasebacks with longer lease terms.

For the company selling the asset, “everything it was costing for them to run it themselves will go down once it’s being run by a professional real estate group,” said Dennis Gralla of Cresa NJ, who represented Sharp in its recent sale in Mahwah. Such a deal puts matters such as fixing a roof and hiring snow plows in the hands of a true landlord.

Not that it’s easy to relinquish control.

“In Sharp’s search for the right person for the sale-leaseback, they had to find somebody who was going to be their partner, in a way,” said Gralla, a principal in the firm’s Rutherford office. “They’ve been in there (about) 30 years, and they’ve always been their own landlord, so they had to find somebody who they knew would be compatible and a good property manager.”

He also noted it’s not necessarily cheaper for a corporation to lease, pointing to depreciation and the tax benefits of owning. But, in Sharp’s case, selling its real estate allowed it to “focus on what they do best, which is consumer electronics.”

The opportunities for sale-leaseback deals come as investors continue to acquire aging office buildings in New Jersey and reposition them through upgrades. Buildings totaling 12.2 million square feet were traded through investment sales in New Jersey in 2014, Schultz said, up from 9.8 million in 2013 and 7.2 million in 2012.

In 2013, Real Capital Solutions acquired a 300,000-square-foot building in North Bergen from Kate Spade & Co., then leased about one-third of the building back to the fashion company.

The firm has since renovated and rebranded the building as it markets the remaining space. Curtis Foster, a Cushman & Wakefield executive vice president who oversees the effort, said in December that having Kate Spade remain as an anchor tenant is key to transforming the property, especially in regard to financial stability.

“It makes it comfortable that tenants who look at the building don’t feel that there’s a threat (of) a default in the loan or any type of a fear that the landlord won’t be there to support the building,” Foster said.

“And that’s important to have stability.”

E-mail to: joshb@njbiz.com
On Twitter: @joshburdnj

Joshua Burd

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