Through 1988 and into 1989, Electronic Associates, Inc. retained Kenneth Merin Associates to solve a particularly troublesome real estate problem. EAI was in a 20-year lease an a large property of which they occupied half. They expected to lose their tenant for the other half in early 1989, and this would have had a significant financial impact on the company. Kenneth Merin developed, planned and carried out a number of alternative programs for EAI, including agreements with the landlord, search for both buyers and tenants, and proposals to the existing tenant. This was a period when the local real estate marketing was worsening rapidly, and the ultimate solution was a modified, shorter lease for only the space occupied by EAI.
REDEVELOPMENT OPPORTUNITY KNOCKSCorporation Turns to Kenneth Merin Associates
For Expert Advice on Complex Facility DecisionInteresting redevelopment opportunities may arise from any of countless real estate scenarios. One example is the Electronic Associates, Inc. (EAI) facility at 185 Monmouth Parkway in West Long Branch, N.J. Kenneth Merin Associates, headquartered in Morristown, N.J., was retained by Electronic Associates in a consulting capacity when EAl's management became concerned about the property's future.
West Long Branch, N.J., headquarters of Electronic Asscoiates, Inc.
Back in 1983, in order to obtain new capital, EAI had sold the holding and leased it back for a lengthy term About hall of the space was leased to a division of AT&T, which generated a substantial cash flow for EAI-the result of the difference in terms between the sublease and the underlying master lease. EAl's management, however was not confident that post-divestiture AT&T would have any need to remain in the property and wanted to consider its alternatives if it were to lose its tenant.
Before retaining the Merin firm, EAI had commissioned a consulting study of the major national real estate firm which had brokered the original sale/leaseback. The study's recommendations left EAl's management with the impression that it was mostly geared towards the generation of additional real estate brokerage fees. At this point, EAI decided to seek the services of a small, independent realty firm, and chose Kenneth Merin Associates.
Alternative to Relocation
"After fully studying all the factors involved, we came to the conclusion that it would not be in the best interests of EAI to relocate its manufacturing operations," explains Kenneth S. Merin, president of the company which bears his name. "We proposed instead that the lease be restructured to allow EAI to remain, but in less space. While we saw significant development potential in the real estate and explained to our client how it could best be exploited, the president of EAI decided that it was in the best interests of the company to get out of the property business altogether. Unfortunately," adds Mr. Merin "there was no easy way out for EAI."
While the most obvious way for the company to disengage from the real estate business would be for it to buy back the property from the investor group which had acquired it in 1983, under the long-term sale/leaseback, it would be 13 years before there would be an opportunity to do so. Also, the option purchase price was not finite, but was to be determined by formula. Furthermore, the purchase option language in the agreement was ambiguous as to the impact of EAl's improvements on the value of the property and whether that meant that the Merin client effectively would be obligated to pay twice for any further improvements .
For their part, the owners of the property, under the master net lease, were equally burdened by an inability to realize the potential of a more intense development of the 43.6-acre tract. So Kenneth Merin Associates proposed to the ownership that it consider releasing EAI from the master lease so as to take advantage of the potential economic benefit which would ensue from the redevelopment of the property.
''The fiduciary responsibility of the managing general partners, however," according to Mr. Merin, ''would not be served by releasing our client from a long-term net operating lease, notwithstanding the potential attornment of the AT&T sublease especially considering the sublease's relatively short remaining term. "
Maximizing Transaction Flexibility
In order to solve the problems of all the parties, Kenneth Merin Associates structured a transaction that will allow the property to be either sold or leased. The real estate firm is acting in the dual capacities of exclusive leasing broker on behalf of the existing ownership, and as exclusive broker for the sale of the property for EAI.
"In order to arrange this," Mr. Merin explains, ''we first negotiated a new agreement between the lessor and the lessee, giving the lessee an opportunity to exercise an option to purchase the property and reconvey it. At the same time, the lessor can notify EAI that its master net operating lease is to be terminated because sufficient net leasing has been procured, which will allow the managing general partners of the property to make a prudent financial decision on behalf of their limited partners."
Under the terms of the agreement, EAI can remain in occupancy of approximately 150,000 square feet of manufacturing and office space for 10 years at an annually escalating rental. The remainder of the property is being offered for lease at $6.50 per square foot net for R&D-type space and $11.50 per square foot as office space.
"We also have the ability to expand our site by approximately 150,000 square feet, which would bring the total 'as of right' buildout to about half a million square feet," Mr. Merin adds. "Another option we are exploring is redevelopment of the frontage for retail uses. The entire redevelopment opportunity is being offered for cash sale at $25 million."
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