A trend that appears to be gaining traction involves major corporations freeing themselves from the responsibilities and costs that come with land ownership. Darden Restaurants recently sold off its Red Lobster holdings for $2.1 billion in a deal which included unloading much of its real estate holdings in exchange for a landlord.
In what is known as a "sale-leaseback," Darden Restaurants entered into a long-term lease for the same properties they had just sold off to Golden Gate Capital, a private equity firm based in San Francisco.
Glen Kunofsy, an executive vice president at Marcus & Millichap, explained that one of the most obvious benefits of moving away from ownership is that businesses are able to write off rent payments as business expenses.
"Corporations shouldn't be in the business of real estate, and there are a host of reasons why. One of the biggest is that returns in the operating business are going to far outweigh the appreciation of the real estate […] Companies and bankers are getting much smarter at identifying the real estate value," Kunofsky tells the Wall Street journal.
Another proposed benefit of a sale-leaseback is that the seller holds pronounced bargaining leverage as the seller of the property. A more obvious upside is that the seller's history with the property provides the ability to negotiate a more acceptable lease agreement due to intimate knowledge of the land and buildings involved. Additionally, with many sale-leasebacks being organized as triple-net leases, the tenant carries the responsibility for the real estate's taxes, insurance and common area maintenance, thus retaining control that is similar to ownership.
Activist investors are especially fond of sale-leaseback transactions because they improve a company's balance sheet with an infusion of cash. Of the $2.1 billion that Darden received in its Red Lobster sale to private-equity firm Golden Gate Capital, $1.5 billion bought Red Lobster's real estate assets in a sale-leaseback transaction.
However, Darden felt additional pressure from stakeholders, like activist hedge fund Starboard Value LP, to go further with its real estate transactions and fold all of its real estate holdings into a publicly traded state investment trust. But the enthusiasm for selling off real estate as a corporation isn't felt by all as Darden believes that the plan of Starboard and others would hurt the company's credit rating and ultimately mean that its investors will take a hit financially.
Another layer of discussion surrounding this topic debates the true value of the real estate in these sales. While Starboard presses for Darden to further its sales of real estate holdings, Jeffrey Smith, Starboard CEO, also went on record as slamming the sale to Golden Gate Capital because it "woefully undervalues Red Lobster and its real estate assets" and reflects an indifference to shareholders who voted for a special meeting prior to the deal's closing.
"This sale is the wrong transaction, at the wrong time, for the wrong reasons. This board's value destructive and self-serving actions fly in the face of corporate democracy," Smith declared in a statement.
Darden CEO Clarence Otis faced opposition from shareholder Barington Capitol Group as well who agreed with Starboard that the sale destroyed value. Barington also pushed for the special meeting where shareholders would have an opportunity to vote against Otis's plan. Starboard estimated that the actual value of Red Lobster's property may have been as high as $4 billion.
With sale-leasebacks proving to add value to some businesses, and the controversy behind Darden's transaction because of disputed real estate value, accurate commercial property valuation software is becoming an even more pressing need. Through e2Value's patented web-based estimator, carriers are able to compile accurate property valuations and minimize the risks involved in varied business dealings.