Lost in Space

Excess real estate is a growing financial burden. But some companies are creatively filling their vacancies.

TeleTech Holdings Inc., for example, recently found itself saddled with a planned headquarters that was too small. As the 124,000-square-foot building neared completion, the Englewood, Colorado-based customer management services firm was ultimately compelled to arrange a deal with AT&T Broadband to buy a larger building in Denver. Selling its anticipated headquarters came with a hitch, however: the building was designed to fit TeleTech as its sole tenant, limiting its suitability for other buyers.

So TeleTech went back to the drawing board with the building’s architect and engineers. “We took the existing design and modified it for multiple-tenant use, incurring the extra design and construction expenses,” says Deborah Miller, vice president of real estate and facilities, declining to divulge the cost. The building was sold in October to Chicago-based RREEF, a real estate investment trust.

While such refitting “can approach the cost of new construction if the change in use is dramatic,” says Sibley, it is becoming increasingly common. So has the option of refitting part of the building, “especially when a company does not need to occupy the entire building space and the seller still needs some of it,” says Tony Marano, former vice president of business services at telecom Lucent Technologies.

To unload a 2-million-square-foot former electronics facility, Lucent recently worked with Cushman & Wakefield to discern the best uses for the building. What’s interesting about the deal (the company declined to name the potential buyer), however, is that Lucent plans to lease back 100,000 square feet of space, “creating cash flow for the buyer,” says Robert Donnelly, executive vice president of Cushman & Wakefield of New Jersey. “Although Lucent may use some of this space, the plan is for them to fully transition out.”

Just Give It Away

For firms that can’t find the right tenants or the right deal, there is always the donation option. The Conservation Fund, an Arlington, Virginia-based nonprofit, for example, “works with companies to determine the dogs in their real estate portfolios,” says CEO Larry Selzer. “If these nonstrategic surplus real estate assets can yield a good appraisal, the company can donate them for a significant charitable tax write-off, while minimizing their operating and carrying costs.”

In most cases, the fund holds on to the donated property for two years to meet the statute of limitations on donor value, and then sells it in the private market. The net proceeds are put into its risk-capital pool to buy land for conservation purposes. Recent donors include Pfizer Inc., which gave 1,500 acres of old mining properties that the fund later sold to a residential real estate developer.

Of course, there is always one other way to offload real estate, particularly leased property: bankruptcy. The Warnaco Group, which expects to emerge from Chapter 11 court protection this month, was able to walk away from leases with landlords covering some 92 retail outlet stores. “Chapter 11 let us step back and say, ‘How much real estate do we really need?’ and then achieve that,” says CFO Jim Fogarty. “Meanwhile, we’re not stuck having to do a deal with some recalcitrant landlord, because we’ve got the bankruptcy judge behind us. Thus, we’re able to get a substantial amount of cash out of these nonperforming assets.” Basically, says Fogarty, “we view Chapter 11 with respect to real estate as a magic wand.”


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