Sale-leaseback time?

May 2, 2008

Peter Slatin, the real estate columnist for Forbes, had an interesting article in this week’s magazine that said even though Real Estate Investment Trusts took a beating in 2007, investors should put their money into REITs that specialize in a technique known as sale-leaseback.

Basically how it works is that a REIT buys a corporate headquarters or large office space from a cash-poor company, and then leases it back to the seller over the next few years, with built-in rent escalations, while the tenant covers operating costs, property taxes and insurance.

Sounds like a pretty good deal for the REITs, right?

Interestingly, two of the three REITs Slatin focuses on have big Baltimore connections. The first is W.P. Carey & Co., “the granddaddy of this tiny group of companies,” which I wrote about in connection to its CEO’s $50 million gift to Johns Hopkins University in today’s paper. Carey is a Baltimorean through and through, and his business plan has carried him from being a freshman year drop-out at Gilman, to a seat at the head of the NYSE’s biggest limited liability corporation, worth just over $1 billion, according to Yahoo! Finance.

The other is Lexington Realty Trust, which, as the Baltimore Business Journal reports, recently bought out USF&G Financial’s share in the iconic Legg Mason building downtown. The tenants there, according to the BBJ, pay just over a million bucks a month in rent — a figure that is expected to drop by half once Legg moves over to Harbor East.

Still, Lexington’s arrangement seems likely to be a profitable one, if they are able to lease the 80,000 square feet of vacant space already in the tower, plus the 240,000 square feet that will be vacated by Legg, without letting it stand empty for too long.

Slatin may be right — these may be good companies to drop your dime on — but in Lexington’s case, only if they’re able to attract a big-name anchor tenant to the aging Legg Mason tower, which some say lacks the modern-day networking amenities and floor-plate size to truly be considered the type of “Class-A” office space that big corporations are after these days. I guess we’ll just have to see.

ROBBIE WHELAN, Business Writer

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Posted by Jackie Sauter, Web Editor | Filed Under business, real estate 

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