Sale Leaseback Gaining Popularity

July 30, 2002
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GRAND RAPIDS — A New York-based investment banking firm has purchased seven Tower Automotive manufacturing facilities in a $55.7 million financing deal that allows Tower to lease the facilities for 18 years.

Tower Automotive, which designs and produces vehicle structural components and assemblies used by the major automotive OEMs, finalized the sale-leaseback transaction with W. P. Carey & Co. LLC a couple months ago and discussed the arrangement during its second quarter conference call July 18.

The financing method provides companies with capital they can use to pay down debt, fund future growth or finance other corporate initiatives.

“This was a particular option we looked at prior to completing our equity offering, which raised over $200 million in cash,” said Tower spokesman David Tuit.

“So when we were in that focus of raising cash to pay down debt, it was one of the things we were investigating, even though our equity offering really took care of that. This was a process we decided to do as well.”

The seven Tower manufacturing facilities, which total 1.9 million square feet of space, are located throughout the Midwest, with one of them in Clinton Township, Mich.

The facilities were purchased on behalf of Corporate Property Associates 14 Inc. (CPA 14) and Corporate Property Associates 15 Inc., both of which are part of the W.P. Carey Group of publicly held, non-traded real estate investment trusts (REITs).

Tower’s Clinton Township facility is now owned by CPA 14.

When Tower’s 18-year leases are up, it will have the option to continue to stay in those facilities, said Edward LaPuma, W.P. Carey & Co.’s managing director and chief acquisitions officer, international.

LaPuma said that in the 30 years his company has been in business, very few of its leaseback clients have ever wanted to leave their space when their leases are up.

W.P. Carey is the largest principal owner of corporate net leased real estate in the country.

“What that essentially means is that we finance companies through the sale and leaseback of their hard assets, specifically real estate,” he explained

“We buy these types of assets, we hold them and we own them. It’s a great opportunity to put your money into your business rather than into real estate.”

The company currently owns and/or manages more than 500 commercial and industrial properties in the United States and Europe totaling more than 45 million square feet of space. It has $4.5 billion in assets.

For companies in any kind of business other than real estate, owning their own real estate is really an inefficient use of capital, he said.

“Our theory is that companies should re-deploy all their money out of real estate and into their core business, be it new technology, be it new equipment, be it research and development or be it paying down debt. Whatever it is, unless the company is in the real estate business, they probably shouldn’t own their own real estate.”

According to LaPuma, the sale-leaseback method of financing has become a very common strategy for corporations today “because it’s a smart and efficient utilization of capital.”

Companies large and small are “getting on that page,” he said, due to the growing awareness of shareholder returns and a heightened desire to maximize their capital efficiency and increase their return on assets and equity.

“I think Tower management is a particularly savvy group of individuals when it comes to understanding the fundamentals of business and the need to make sure they keep their balance sheet in place and that their earnings are good,” he said.

There’s been a “remarkable” surge of interest in sale-leaseback transactions, LaPuma said, particularly with the capital market’s decline and the increasing difficulties companies are having in terms of raising capital.

When he joined the company in 1994, it was doing about $70 million in business annually. Now it does more than $500 million, a figure he thinks could surpass $1 billion this year.

Historically, the prominent companies that used this type of strategy were real estate intensive companies like Wal-Mart, he said.

Besides Wal-Mart, LaPuma’s firm has worked with such companies as Federal Express, Lucent Technologies and Advanced Micro Device to create financing solutions to meet their capital needs.

“As this becomes an increasingly popular strategy, you’ll see more companies in your area entering into these types of transactions. The best and the brightest in business are doing this.”

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