Real Estate Southern California
Structured to Win: The Sale-Leaseback Model
February 2006

By: Kevin Kaseff

In order to generate free cash flow or generate profits while better controlling their facility costs, corporations are taking advantage of today’s escalating property values and low interest rates by shedding real estate assets and signing long-term leases. This trend is expected to continue in 2006 for both private and public companies because it yields a number of resounding benefits.

When a business sells its facilities while retaining occupancy via a long-term sale-leaseback, the business is able to free up capital that can be invested into the growth of the company, typically at a much higher rate of return than the real estate ownership was generating. This improves the balance sheet and allows the business to retain control of the property. Essentially, the sale-leaseback process unlocks the value in a business’ fixed assets and provides immediate increase in free cash flow or generates profits from asset sales. Businesses have traditionally acquired real estate in an effort to better control their occupancy costs, but that is no longer the case. Creatively structured leases can give companies maximum flexibility for expansion and contraction while at the same time allowing for a full write off of the lease payments and operating costs.

When a company is less than investment grade or requires a non-standard leaseback, finding the right real estate investment firm is critical. An example is the case of the Vitesse Semiconductor Corp sale to Titan Real Estate Investment Group Inc. Vitesse designs, develops and markets a diverse portfolio of high-performance, cost-competitive semiconductor solutions for communications and storage networks worldwide. The company sold its office and engineering facility to Titan for $6 million and then leased the property back on a long-term basis.

The empty building, owned by Vitesse, sits next door to the company’s headquarters, while approximately 100 Vitesse employees occupied a leased facility two blocks away. This inefficiency among the workforce was corrected by selling the building to Titan, which converted it from an industrial to office building by installing a mezzanine level and increasing the rentable square footage to 64,000 sf. The four-month construction project will allow all Vitesse employees to reduce downtime traveling between offices, reduce company overhead and generate an asset sale. The company minimized construction overruns by contracting with Titan to handle the project. Vitesse’s executive vice president Gene Hovanec said the decision to sell its facility, a 50,454-sf industrial building in the fast-growing city of Camarillo, “affords Vitesse the flexibility in managing our business and allows us to have greater control over our facilities-related expenses.”

The one-story single-tenant industrial/warehouse/light manufacturing building sits on 4.3 acres at 4721 Calle Carga in Camarillo, strategically located just off the 101 Ventura Freeway, approximately 40 miles from Santa Barbara and 45 miles from Los Angeles. The building is a concrete tilt-up with pre-cast concrete panels and a painted exterior surface. The prime location of the property capitalizes on business growth and burgeoning population occurring in both the Ventura County and San Fernando Valley areas, where a variety of business enterprises provide a strong economic base.

Titan is a large national commercial real estate investment firm where the principals have more than $1.7 billion in transaction experience. Titan’s commercial division based in Los Angeles has completed more than a dozen sale-leaseback transactions for office, industrial and retail properties across the country in the past year. Among these successful deals: a 12-property, $55-million portfolio from Office Depot; a $27-million sale-leaseback of an office/industrial complex from Input Output, an oil services firm, in Houston; a $14-million industrial sale-leaseback for a manufacturing company in Hawthorne; and a $13.3-million sale-leaseback of an office/flex facility for HEI Inc. in Boulder, CO.

The recent sale-leaseback deal with Vitesse has given the company the flexibility it needs to manage its business and it has improved its financial strength. The deal has also been a sound investment for Titan.