Refinance or sale-leaseback? How KONG capitalized on an unexpected real estate opportunity
The KONG Company, LLC, is an American company headquartered in Colorado that manufactures and distributes pet toys throughout the United States, Europe, Australia, and Japan from warehouse locations in both the Midwest and Southern California regions.
In 2012, KONG bought a 103,128 SF building in Long Beach, Cali., that operates as its primary West Coast distribution facility. In 2021, KONG began the process of refinancing its original acquisition loan and received an appraisal that far exceeded the original purchase price from 2012. Over the next month, KONG received two unsolicited offers to purchase the building from nationally recognized industrial real estate investors. KONG reached out to its tax advisors at Plante Moran to help decide whether to sell and leaseback the property or continue with the refinance process. Knowing the decision would require extensive real estate market knowledge, the tax team brought in Plante Moran Real Estate Investment Advisors (PMREIA) to determine the best path forward.
PMREIA has helped many operating businesses monetize their real estate through sale-leasebacks and other disposition strategies. PMREIA provided real estate market intel and financial analyses that helped KONG understand how the sale offers it had received were actually too low given current market conditions:
- The facility is well positioned in one of the most desirable submarkets in the country, strategically located near the ports of Los Angeles and Long Beach, which are the first and second busiest ports in the United States.
- In addition, the market was extremely land constrained, with virtually no new land for development.
- The quality of the building was also an important factor, as modern high-bay warehouses suit a large number of potential tenants, increasing the marketability of the property to investors.
- KONG is a strong company, with a solid balance sheet, which further enhances the value of the building in a sale-leaseback transaction.
All of these factors made PMREIA confident that KONG could go to market with the property to generate competition that would maximize proceeds, expedite closing, and still allow KONG to execute on its operational business plan.
“We approached Joe and Greg very skeptical about completing a sale-leaseback deal,” said Matt Sterk, vice president of finance at KONG, “and after several days of research on their end, they came back to us with a number of market-related conditions and facts that firmly supported the decision to move forward with a sale-leaseback transaction.”
The biggest challenge moving forward: PMREIA had less than three months to execute a marketing process then negotiate and close on the sale-leaseback before impending tax changes took effect at the start of the new year.
PMREIA pulled the project together quickly and went to market within a couple of weeks of KONG’s decision to move forward. Despite only a two-week offering period, PMREIA was able to reach a wide audience, which included all the biggest national real estate investment companies.
KONG received offers within range of PMREIA’s target pricing. Competition drove the final price to exceed the target. When the buyer was selected, PMREIA ensured the closing concluded rapidly, well before the end of the year.