CHICAGO—Long-term net leased assets have become quite popular, and JLL has assembled a team of experts to help clients decide if instead of leasing they would prefer controlling development of new facilities and arranging for third-party investors to purchase the properties upon completion.
“It can be an eye-opener for them,” Bruce Westwood-Booth, managing director of JLL's capital markets division, tells GlobeSt.com. He will take part in a panel on sale-leasebacks and build-to-suit developments at this week's Real Share Net Lease 2015 conference in New York City.
Doing things this way reduces a developer's risk, and according to a white paper produced by JLL, “can reduce or eliminate their required equity contribution and therefore reduce the ultimate lease rate for the tenant.”
For example, if a 450,000 square-foot development costs $100 million to build, a developer that controls the process would probably get about 8%, which would come to $17.78 per square foot. But if the tenant brings in an investor and uses JLL to run the whole process, the investor would likely want only 6%. Westwood-Booth adds that using this method the same project would cost about $95 million, and at 6%, this would contribute $12.67 to the lease rate.
The four or five dollars per square foot can eventually have a major impact on a company's bottom line. “Over 20 years, you're saving tens of millions of dollars,” he says. “All because it's a tenant-led process.”
Such a process does not work for every portfolio. “We encourage corporate real estate directors to take an active role in collaborating with the senior finance and operation teams within their organization to develop a process for evaluating ownership versus leasing decisions, along with alternative structuring opportunities,” the JLL white paper states.
The tenant-led method seems to work best with very strong tenants that need new long-term headquarters. “Those are the people that are coming to us,” Westwood-Booth says. For example, JLL helped the American Academy of Orthopaedic Surgeons develop its new 165,000 square-foot headquarters in Rosemont, IL, a suburb of Chicago.
Furthermore, Zurich Insurance used JLL to acquire a 40-acre chunk of Motorola Solutions' campus in Schaumburg and launch a 720,000-square-foot build-to-suit headquarters. The development will be completed by the fourth quarter of 2016. JLL helped secure more than $333 million in financing for the project, which was billed as the largest build-to-suit single tenant, net-leased project in North America in 2014.
Other clients include Toyota, Mercedes Benz, Baxter International and others.
“Investors are all over this,” Westwood-Booth adds. Some are giving JLL commitments for projects that are 30 months away from occupancy. Single-tenant REITs, especially, “are all excited about being investors in this process.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
