PROBLEM: Getting Client Out of the Realty Business
PROBLEM-SOLVER: Kenneth Merin Associates

ONE FIRM'S problem is another's opportunity, says Kenneth Merin, whose Parsippany, NJ.-based real estate organization specializes in corporate facilities. This proved to be the case with a consulting and brokerage assignment that the Merin office undertook for Electronic Associates, Inc. (EAI), involving that company's headquarters office and manufacturing facility in West Long Branch, N.J. The Merin firm was called in by the client to address the anticipated problem from the pending expiration of a substantial sublease on about half of the almost 400,000-square-foot property to AT&T. EAI had earlier entered into a long-term sale/leaseback as a financing mechanism and benefited from the AT&T tenancy being at a rental rate substantially in excess of the effective cost per square foot of the portion of the net operating lease occupied by the subtenant.

"Based on our initial consulting study," Mr. Merin explains, "a decision was reached by our client's senior management that they no longer wished to be in the real estate business. In order to maximize the value of the property, we estimated at least $5 million of additional capital would be needed to refurbish the facility and make it more attractive either for a renewal by the existing tenant or the procurement of new subtenants. The opportunity also existed to expand the site by another 150,000 square feet, but the sale/leaseback did not offer an opportunity to purchase the building for another 13 years.A more intensive development of the site was further complicated by the ambiguous language in the option to purchase."

The Merin firm structured an agreement between EAI and the owners of the property affording the tenant the opportunity to repurchase the real estate so that the entire package could be offered to the development community. Merin simultaneously entered into an agreement enabling the owners to recapture operational control of the property and retain EAI as a tenant in half the building, albeit at an increased rental per square foot, or approximately the same as could be expected with the retention of AT&T. The problem-solver was finally in a position to induce AT&T to enter into a new lease because operational control of the property would be in the hands of a developer committed to making capital improvements in conjunction with the new 70,000-square-foot lease to AT&T.

"In the midst of the lease negotiations," Mr. Merin notes, "we encountered an asbestos problem in the portion of the property to be vacated by AT&T. This was in addition to the need to negotiate deactivation and removal of more than a half-dozen underground storage tanks. Because the original AT&T lease document pre-dated any concern about asbestos in the workplace, it became necessary for our firm to become involved in the solicitation of proposals for asbestos removal and/or abatement."

Ultimately, the Merin firm negotiated leases for EAI on the 170,000 square feet it retained and the 70,000 square feet leased to AT&T. The remaining 90,000 square feet of space could then be refurbished and offered for lease to third parties. This enhanced the yield to the owners, Mr. Merin explains, while removing EAI from the real estate business with no net increase in operating costs, and obtaining an improved work environment for AT&T.

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