Tapping Into
Hidden Potential
Using the balance sheet to lower your occupancy cost
April 2014
To Lease or to Own?
Driving Value
2
Determinants of Corporate Real Estate Value
RentEscalations
CorporateGuarantee
Mastervs.IndividualLeases
S...
Lower Your Occupancy Costs
The Right Tool, The Right Opportunity, The Right Investor
Tool Lease Term Lease Rent Credit
Wor...
 Potential to acquire at low basis
 Absolute control over property
 Reset depreciation of Leasehold Improvements
 Ceas...
$21.4 Million Purchase Price
$200K NPV Benefit
$700K Annual Earnings Benefit
Acquisition
Purchase a currently leased asset...
Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Can Accept Long
Term
Invest...
Earnings Neutral Transaction
Alleviate Residual Risk
$18 Million Day 1 Net Proceeds
$3.1 Million NPV Benefit
Long Term Sal...
Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Has Short Term,
Can Do Long...
Better Lease / New Landlord
$400K Annual Earnings Benefit
$6.0 Million NPV Benefit
Purchase Price = Sale Price
Acquisition...
Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Above Market
Speculative
Cr...
70.24 PSF Buy Down Payment
$28 PSF Earnings Benefit (10 years)
$6.91 PSF NPV Benefit
Reduced Rent $10 psf annually
Lease B...
Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Long Term
Investment
Grade
...
Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Term will provide
higher sa...
Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Mix of Long &
Short
Flexibi...
To Lease or to Own?
You Can Find
the Answer with
JLL’s Corporate
Finance Team
© Copyright 2014 Jones Lang LaSalle
Bruce Westwood-Booth
Managing Director,
Corporate Finance
Chicago, IL
+1 (312) 228-296...
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Hidden Potential of Your Occupancy Costs: How JLL’s Corporate Finance Team Can Help

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Firms that have to decide to lease or own space they may occupy have a large variety of financial options that have direct impact on their bottom line. This presentation demonstrates the financial impact of all the various options, within both ownership and lease executions, and how JLL’s Corporate Finance Team can help any firm discover the most valuable outcome.

Learn more by visiting: http://www.us.jll.com/united-states/en-us/midwest-capital-markets

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Hidden Potential of Your Occupancy Costs: How JLL’s Corporate Finance Team Can Help

  1. 1. Tapping Into Hidden Potential Using the balance sheet to lower your occupancy cost April 2014
  2. 2. To Lease or to Own?
  3. 3. Driving Value 2 Determinants of Corporate Real Estate Value RentEscalations CorporateGuarantee Mastervs.IndividualLeases StructuralObligation EarlyTermination ROFO/ROFR Assignment/Subleasing RentEscalations CorporateGuarantee Mastervs.IndividualLeases StructuralObligation EarlyTermination ROFO/ROFR Assignment/Subleasing FixedFixedCPICPI FixedFixedCPICPI YesYesNoNo YesYesNoNo MasterLeaseMasterLeaseIndividualLeaseIndividualLease MasterLeaseMasterLeaseIndividualLeaseIndividualLease BondableBondableNNNNNN BondableBondableNNNNNN NoNoYesYes NoNoYesYes NoneNoneYesYes NoneNoneYesYes NoneNoneTenantControlledTenantControlled NoneNoneTenantControlledTenantControlled MinimizesValueMinimizesValue MaximizesValueMaximizesValue RentEscalations CorporateGuarantee Mastervs.IndividualLeases StructuralObligation EarlyTermination ROFO/ROFR Assignment/Subleasing RentEscalations CorporateGuarantee Mastervs.IndividualLeases StructuralObligation EarlyTermination ROFO/ROFR Assignment/Subleasing FixedFixedCPICPI FixedFixedCPICPI YesYesNoNo YesYesNoNo MasterLeaseMasterLeaseIndividualLeaseIndividualLease MasterLeaseMasterLeaseIndividualLeaseIndividualLease BondableBondableNNNNNN BondableBondableNNNNNN NoNoYesYes NoNoYesYes NoneNoneYesYes NoneNoneYesYes NoneNoneTenantControlledTenantControlled NoneNoneTenantControlledTenantControlled MinimizesValueMinimizesValue MaximizesValueMaximizesValue Lease StructureGross Bondable Purchase OptionYes No HIGHEST CAP RATE LOWEST CAP RATE Location Property Condition Lease Term Tenant Credit Property Class 25 years0 years Investment-GradeSpeculative Class C Class A Tertiary Market Primary Market Poor Excellent Value Deterrents Positive Value Drivers
  4. 4. Lower Your Occupancy Costs The Right Tool, The Right Opportunity, The Right Investor Tool Lease Term Lease Rent Credit Worthiness Balance Sheet Vacancy Discount Rate Acquisition Long-Term Sale Leaseback Acquisition Sale Leaseback Lease Buy Down Tenant Led Build- to-Suit Short-Term Sale Leaseback Deal Packaging Identifying your company’s leverage points can help determine which capital markets tools can help tap into hidden value in your real estate portfolio. 3
  5. 5.  Potential to acquire at low basis  Absolute control over property  Reset depreciation of Leasehold Improvements  Cease costly rental obligations  NPV benefits if low cost of capital Points of Leverage Lease Term Lease Rate Credit Worthiness Balance Sheet Vacancy Discount Rate Short Remaining Lease Term Excess Capital Low Discount Rate Acquisition Purchase a currently leased asset ConsiderationsBenefits  Asset goes on balance sheet  Debt goes on balance sheet  Not always most efficient use of capital  Potential for losses if company no longer needs building in the future (residual risk) 4
  6. 6. $21.4 Million Purchase Price $200K NPV Benefit $700K Annual Earnings Benefit Acquisition Purchase a currently leased asset Client Situation $1.1 Million Annual Cost Savings  While each acquisition is different, a recent acquisition yielded significant savings for our client. The transaction contemplated a 100K SF asset with a net rent of $15 psf purchased at a 7.00% cap rate.  The client expected to use the building for 15+ years and had a discount rate of 5.00% Financial Impact 5
  7. 7. Points of Leverage Lease Term Lease Rate Credit Worthiness Balance Sheet Vacancy Discount Rate Can Accept Long Term Investment Grade High Discount Rate Long Term Sale Leaseback Sell property for upfront proceeds, but retain long-term control  Preserve capital  Monetize asset to generate capital and redeploy  Remove assets from balance sheet  Structured to meet key objectives  Enhance occupancy flexibility  Transfer residual risk exposure ConsiderationsBenefits  Credit and lease term drive pricing  EBITDA Impact  NPV benefits greatest for companies with high cost of capital  Strategic nature of asset  Need for future capital improvements 6
  8. 8. Earnings Neutral Transaction Alleviate Residual Risk $18 Million Day 1 Net Proceeds $3.1 Million NPV Benefit Long Term Sale Leaseback Sell property for upfront proceeds, but retain long-term control  Clients executing long term sale leasebacks include Walgreens, Citi, EDMC, and AT&T, among others.  Cap Rates on these types of transactions are at historic lows, making now an ideal time for corporate occupiers to consider this strategy  This example considers a 100K SF asset leased for 15 years at a net rent of $15 psf.  The client had a discount rate of 10.00%, an annual depreciation expense of $5.33 psf and re- deployed the proceeds at a 5.00% return. Client Situation Financial Impact 7
  9. 9. Points of Leverage Lease Term Lease Rate Credit Worthiness Balance Sheet Vacancy Discount Rate Has Short Term, Can Do Long Term Investment Grade High Cost of Capital Acquisition Sale Leaseback Purchase a currently leased asset and perform a sale leaseback, taking advantage of cap rate arbitrage  Potential to acquire at low basis  Generate upfront proceeds or lower long term occupancy costs by utilizing cap rate arbitrage  Choose new landlord  Utilize credit to drive down rent  Utilize credit to increase cash ConsiderationsBenefits  Prevents title from passing to tenant  Sale leaseback generally performed “off-market”  Less likely to receive tenant improvement allowance than standard lease extension  Option to sell leasehold improvements 8
  10. 10. Better Lease / New Landlord $400K Annual Earnings Benefit $6.0 Million NPV Benefit Purchase Price = Sale Price Acquisition Sale Leaseback Purchase a currently leased asset and perform a sale leaseback, taking advantage of cap rate arbitrage  JLL recently executed an acquisition sale leaseback for a client seeking to enter into a new lease with a new landlord, and also monetize significant leasehold improvements  110 K SF facility highly specialized for client’s use  8.00% client discount rate  Significant financial benefits were realized through the monetization of leasehold improvements Client Situation Financial Impact Monetized $28M of LH Improvements 9
  11. 11. Points of Leverage Lease Term Lease Rate Credit Worthiness Balance Sheet Vacancy Discount Rate Above Market Speculative Credit Excess Capital Low Discount Rate Lease Buy Down Buy down the remaining rental obligation in an existing lease  Reduce rental cost to market rate  Hedge against the risk of a future impairment if the facility becomes surplus  Decrease carrying cost of lease space in order to facilitate subleasing at market  Deploy capital ConsiderationsBenefits  Utilize available, low-cost company capital to buy- down an existing lease obligations where the landlord’s return expectation is higher than the company’s cost of capital  Buy Down payment against taxable income  Requires cash upfront which may increase company debt 10
  12. 12. 70.24 PSF Buy Down Payment $28 PSF Earnings Benefit (10 years) $6.91 PSF NPV Benefit Reduced Rent $10 psf annually Lease Buy Down Buy down the remaining rental obligation in an existing lease  The client in this example had sub- investment grade credit but cash available to deploy  8.75% discount rate  10 years of term at $20 psf  The rent was reduced $10 psf annually  Based on an investor IRR requirement of 7.00%, the buy down payment was $70.24 psf Client Situation Financial Impact 11
  13. 13. Points of Leverage Lease Term Lease Rate Credit Worthiness Balance Sheet Vacancy Discount Rate Long Term Investment Grade Desire to Re-size / Re-locate High Discount Rate Tenant Led Build-to-Suit Lease (Vs Developer Led) Leverage strong company credit and relationships to achieve optimal pricing while building a new facility  New facility designed to company’s standards  Reduce operating expenses through efficiencies  Densify to modern standards / reduce sf  Ability to fund entire project cost, including Tis  Potential to receive state or local incentives  Present value savings on lease payments ConsiderationsBenefits  Ability to manage incentive process  Ability to manage developer  Requires long term lease  Site selection can be difficult if developer controlled  Lease classification scrutinized by underwriters 12
  14. 14. Points of Leverage Lease Term Lease Rate Credit Worthiness Balance Sheet Vacancy Discount Rate Term will provide higher sale price Short Term Sale Leaseback Sell and lease a property back for less than 5 years  Generate higher sale price than vacant sale  Allows buyer to pass reduced stabilization costs to seller through increased sale price  Minimize loss on assets where long term occupancy is not anticipated  Maintain space flexibility ConsiderationsBenefits  Leaseback terms of five years or less are viewed as a staged exit and price conservatively  Market dynamics and real estate fundamentals effect pricing more than a long term SLB  Eye on the balance between deprecation and rent  Strategically developing a story around renewal probability can significantly impact proceeds 13
  15. 15. Points of Leverage Lease Term Lease Rate Credit Worthiness Balance Sheet Vacancy Discount Rate Mix of Long & Short Flexibility Investment Grade Under Utilized Space High Discount Rate Deal Packaging Enhance pricing and mitigate GAAP losses by packaging low yield plays with high yield plays  Generates sale proceeds and allows redeployment of capital into core competencies  Control over allocations of gains and losses  Allows for disposition of unwanted space while minimizing upfront GAAP losses  Right-size portfolio space, lower occupancy costs ConsiderationsBenefits  Need to sell dominant share of long term assets to offset vacant and short term asset losses  Can be structured in a variety of ways to fit the company’s needs and optimize the portfolio as a whole  Individual property sale value must be at fair market value 14
  16. 16. To Lease or to Own?
  17. 17. You Can Find the Answer with JLL’s Corporate Finance Team
  18. 18. © Copyright 2014 Jones Lang LaSalle Bruce Westwood-Booth Managing Director, Corporate Finance Chicago, IL +1 (312) 228-2966 bruce.westwood- booth@am.jll.com Intrigued and want to learn more? The full presentation includes updates on the capital markets environment, additional financial examples, further financial example detail, and tips on how to identify opportunities to create value in your real estate portfolio. >> click here to request the full presentation

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