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Driving Value from Corporate Real Estate During an Acquisition

April 2, 2014 Article 2 min read
Brandon M. Podolski Plante Moran Realpoint

A well-thought-out capital structure is paramount to optimizing return on investment within any enterprise, and real estate often plays a significant role in the equation. Is a company better off as a tenant or an owner of its space? This question should be looked at closely during any acquisition process.

Adequately valuing owned and/or leased real estate during an acquisition can create leverage to negotiate the purchase price and lay the framework for strategically driving the most value of the acquisition in the long term. If the real estate is owned, in most instances, the organization’s tenancy can create meaningful value that could be monetized concurrent to or outside of the acquisition. Likewise, lease commitments at above-market terms create financial obligations that reduce the enterprise value. Organizations need to conduct due diligence to determine the true market value of the real estate and identify if all lease obligations in the portfolio are at a competitive market rate.

Depending upon the strategic reason for the acquisition, organizations often may consolidate the current facility or invest in expansion. Understanding the local incentive landscape and identifying investment levels required to trigger them, organizations can better justify a purchase price and plan for expansion. Part of this process looks at the cost and capacity to expand or retrofit the current facilities. Identifying if current real estate will support the new plans for growth or identifying capacity in your current portfolio will impact this decision. If the goal is to consolidate, is a sublease or sale leaseback of the real estate feasible? Thoughtful consideration of the available financing mechanisms can help to facilitate the most cost-effective implementation of an expansion or consolidation.

One option to analyze involves purchasing the business with the option to buy the real estate. In this scenario the current owner becomes the landlord. If this is not an option, a sale/leaseback can find a third-party real estate investor to sell the building to and subsequently lease it back to you. This will put cash back into your operations and give you the option to leave after the lease term expires.

Even though the cost of capital remains at historic lows, an organization needs to analyze if it can earn a better return by investing in its core operations or owning real estate. Commercial real estate is a depreciating asset with many external factors potentially impacting return on investment. Thoughtful analysis of the financial impact associated with the ongoing ownership of real estate as opposed to investing capital in core operations ensures an informed decision. During the due diligence phase, speed, confidentiality, and valid information are critical. Sharing details of your entire portfolio with a trusted advisor will allow them to see how the pieces fit in to the larger picture.

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