Financing the road to recovery

January 2013 | SPECIAL REPORT: GLOBAL RESTRUCTURING & INSOLVENCY

Financier Worldwide Magazine

Private equity professionals, real estate developers and their financiers have been using the refinancing-excess-cash-flow and selling-assets model for decades in their own activities and wealth creation. During the first wave of mergers, acquisitions and leveraged buyouts over a quarter century ago, many companies with excess facilities were bought and sold, and some of the real estate was converted for different uses. In the 1980s and most of the 1990s, the high cost of capital, and a generally sluggish real estate market, contributed to the low level of relative importance attributed to the potential benefit and value of the real estate in any given transaction. Since real estate often takes a long time to be repositioned and monetised, the present discounted value of the potential upside to the private equity portfolio company professional was deemed small, relative to the financing cost and effort needed for conversion.

Today, with low interest rates and financiers helping the market move away from a capital constrained environment, factors such as smart growth development and improved environmental remediation technology have combined to create the opportunity for private equity professionals and portfolio company managers to increase returns by paying more attention to real estate as a valued asset class. Indeed, real estate has evolved into a financing vehicle that can increase deal returns. Some companies have business liquidation values that equate to less than the worth of the real estate they own, occupy or control. The challenge often remains for financiers developing capital structures that can accommodate both the partial liquidation of real estate assets while keeping the enterprise intact and available for future expansion. Expanding companies will accommodate their growth by utilising the closed facilities of others until new commercial construction can meet demand. Specialised projects often require new facilities that are best financed by the construction of new buildings in a business park.

Ask any major-city planning official and, as you might expect, he or she will be hard-pressed to identify large parcels within the urban core that were not previously used for another purpose. Some cities were previously dominated by cattle yards, others by ship building facilities, and others grew around various industrial centres, such as one California city which once was the world’s largest dynamite factory. Cities all over the world have been rebuilding themselves throughout time. Often, it is a monarch that will raze a section of the city for new development, like some accuse Emperor Nero of doing in Ancient Rome.

In the coming wave of mergers, acquisitions and leveraged buyouts, there is an opportunity for takeover specialists, cities and developers to work together to reposition or reconstruct business office space for the benefit of all stakeholders, including cities. This concerted effort will add jobs, create value and curb urban blight.

Business parks are groupings of improved, ready-to-go lots, often located near airports, rail, ports or freeways with the intention of utilising the commercial enterprise that manufactures, adds value or distributes goods and services. Developers and owner-users are able to construct new facilities on these entitled lots to suit specific distribution, manufacturing and various industrial and commercial business needs, thereby investing and preparing for an economic turnaround while providing room for corporate relocation, retention and expansion.

The recent tendency for most communities is to shelve or postpone business park projects. However, the stimulus packages that have been improving our roads and infrastructure should provide significant initiative to the community to continue job creation and commercial development. The capital allocation problem is that almost all urban centres and core industrial parks are already ‘built-out’, making the development of large business parks unrealistic and impractical in urban core locations. Most communities would have to invest in repurposing and demolishing existing buildings to create ready-to-go lots for a business park.

Outsourcing has played a major role in the new flow of the supply chain. Rather than shipping finished goods and materials toward the ports located on the coast or various export sites, the major direction of supply is from the ports to locations in consumer rich city centres. Public finance professionals have been tasked with providing capital for large scale port expansion and infrastructure projects. Private financiers have secured funding for the construction of new distribution and trade buildings. They have also accommodated the capital needs of outsourcing firms by meeting their new financial requirements. Private equity plays a large role as the industrial companies acquire and rationalise to capitalise on supply chain reversals. Factory sites and other excess real estate will be discovered as the rationalisation process moves forward.

Private equity firms familiar with sale-leasebacks and build-to-suits have helped expand the role of business parks through the creation of new facilities, built specifically for their portfolio companies’ needs. Some companies have formed clusters due to the economies of agglomeration and friendly government incentives.

Land and buildings are needed as collateral for the financing of many large project endeavours. The best ways for a community to increase and encourage revenue is to make itself known in the global and corporate market place. Area amenities, a good workforce and government incentives are often not enough to stimulate growth in an area without shovel-ready land. One of the best ways a community can solve this problem is by encouraging the development of a business park. By creating a business park, the community can benefit from the expansion of a company, privately or publicly owned.

John D Troughton is a senior director at Cushman & Wakefield, Inc. and can be contacted on +1 (510) 908 5007 or by email: john.troughton@cushwake.com. Patrick Keener is the Manager of Energy Services for the Redding Electric Utility and Economic Development Liaison for the City of Redding and can be contacted on +1 (530) 339 7225 or by email: pkeener@reupower.com. The authors would like to thank Lisa Borden, a research professional, for her assistance with the preparation of this article.

John D Troughton

Cushman & Wakefield

Patrick Keener

Redding Electric Utility