Meet Your New Property

Information Gap
To be sure, gathering information about a target's real-estate assets may be anything but easy. Many corporations manage their real estate in a decentralized fashion, with data stored in disparate, unconnected systems and databases. As a result, "a surprising number of businesses don't know the value of their operational [real-estate] portfolio," asserts RICS's White. "And they have only a vague notion of what their real estate is costing them."

For acquirers, pulling all the data together in order to assess the value and performance of a target's portfolio can be a Herculean task — and can disrupt the timing of a deal. Once a deal is done, the acquirer then faces the problem of managing new portfolios and systems. That's currently the case at SBC Communications. The Dallas — based Baby Bell has done several major mergers since 1997, and each company involved has come with its own real-estate-management system.

"The challenge now is managing a 130 million-square-foot portfolio and approximately 5,000 buildings requiring facility management — without a common system," says Mary Manning, senior vice president of real estate at SBC. The telco is implementing a building-management system and a data warehouse to centralize portfolio information. Still, new real-estate systems aren't high on the corporate priority list, says Manning.

They may move higher up if the accounting standards for real estate change. Currently, real estate is accounted for at historic cost, but the International Accounting Standards Board is pushing to require companies to measure real-estate worth at fair value. If the IASB gets its way, companies will be obliged to generate better information about their real-estate assets.

But the advent of fair-value accounting for real estate is not expected to arrive before 2005. In the meantime, corporate real-estate managers will have to continue exercising their powers of persuasion. Concedes former BT executive White, "It will probably take another two to three years to bring about a noticeable change in managers' thinking about property."

Sidebar: Synthetic Risk
Another real-estate red flag for acquirers these days is synthetic leases, which experts say can camouflage significant liabilities. These vehicles grew popular in the late 1990s as a way for corporate lessors to obtain off-balance-sheet financing while avoiding the earnings hit from depreciation associated with owning real estate both of which improve reported return-on-asset ratios.

But most synthetic leases are short term (usually between 3 and 10 years), and many are coming due now. The reset can have a sizable impact on the value of a takeover target. "What might scare an acquirer is a synthetic lease coming due in 3 to 5 years, which might mean a big refinancing risk," says Sean Sovak, chief acquisition officer at New York-based corporate real-estate financing firm W.P. Carey & Co. LLC.

What's more, synthetic lessees often reserve the right at the end of a lease to buy a property, extend the lease, or sell the property and take any gain or loss in its value. "There's also a risk that when the leases expire, the value of the real estate may be less than the value of the synthetic itself," notes Sovak. It's critical, therefore, that acquiring managers be aware of maturities on synthetics.

Finally, new accounting rules that took effect earlier this year may further complicate the picture. The rules will require lessors to either unwind their deals or restructure them with more outside capital. If the deals are not unwound or restructured before an acquisition, buyers will inherit the job.

• « previous
• 1
• 2