In recent years, many companies have been reconsidering their real estate strategies. This is especially true for companies that own and utilize significant real estate in their business. In many cases, this is either part of an effort to unlock untapped shareholder value in existing assets or to provide growth capital for the continued expansion of capital-intensive industries. Increasingly, activist investors are driving these pressures. Recent tax reform legislation and the coming required adoption of the new lease standard are also factors driving additional considerations.
Pressure from shareholder activists is not likely to go away any time soon. Management of companies of all sizes and in all industries need to be prepared to provide shareholders and investors with a well-articulated strategy that is supported by a proactive assessment of the company’s existing property portfolio. By telling a clear story and openly communicating with shareholders and investors, companies both minimize the risk of becoming an activist target and help build shareholder value.
Recent tax reform legislation signed into law in December of 2017 introduces new interest deduction limitations for many companies. However, the legislation provided a significant exception for borrowers engaged in real estate businesses. As a consequence, businesses with significant real estate businesses or assets may consider strategies to isolate real estate related activities and assets to reduce the burden of the new interest deduction limitations. Other businesses may consider various monetization strategies that result in proceeds being used to pay down existing debt and reduce the interest expense subject to potential limitation. These transactions may be coupled with other structures that could convert interest otherwise subject to interest limitations to other expenses not subject to the interest limitations, such as rental expense. Other facets of the tax legislation, including the reduction to the general US corporate tax rate, retention of like-kind exchanges for real estate, limitations on state and local tax deductions, may also increase the potential benefits of engaging in real estate monetization transactions.
There is no one-size-fits all answer to how companies can either realize or create enhanced real estate value because the right answer for one company may be completely difference for another.