Cushman & Wakefield is partnering with the British real estate company Legacy Portfolio to bring a $1 billion fund to the U.S. aimed at buying real estate obligations off the balance sheets of corporations seeking to downsize and limit the liability of upcoming accounting rule changes.
“We’re raising enough capital to help companies remove about a billion dollars of lease liabilities from their balance sheet,” said Michael Rotchford, an executive vice president at Cushman who specializes in financially structuring complex real estate transactions. “The goal is to allow big companies to avoid having to take write downs for assets they don’t occupy any longer. It’s a quick, simple way for them to remove liability that might otherwise be slow to remove.”
Rotchford and Michael Dow, chairman and CEO of Legacy Portfolio USA, said that the fund will seek to assume leases from large corporate tenants who want to vacate space and clear the real estate from their balance sheet. For reasons of efficiency, Dow said that the fund will target companies that want to dispose of numerous locations on a national scale or make significantly sized individual divestitures.
Spurring the fund is an interesting intersection of timing. Many companies around the country are still shedding space in the aftermath of the recession, while mergers and acquisitions, which usually create redundancy that corporations seek to prune, have begun to pick back up as the economy improves overall.
“A merger or acquisition oftentimes results in at least some duplication of operations,” Dow said. “Companies will often end up wanting to shed about 10-20% of the combined company.”
Rotchford and Dow also say that upcoming accounting rule changes that will require companies to report lease obligations as a liability have heightened the desire among tenants to purge excess space.
“The benefit of this for them is they don’t have to worry about subleasing numerous locations,” Dow said. “Chief financial officers are starting to pay attention to this because of the accounting changes. There’s a whole new group of senior level executives who are now focused on getting rid of real estate whereas in the past, this really would have been a conversation with a lower level executive that focuses only on real estate and wouldn’t have as much traction.”
Rotchford and Dow said that companies will pay Legacy to take over leases, transferring liability for the remaining rent to the fund. From there, Legacy will either negotiate to give the space back to the landlord – hopefully with a cancellation fee that is less than what the fund paid to buy the lease – or sublease the space. Rotchford said that Cushman would help Legacy connect with tenants and also handle subleasing work.
Rotchford said that the fund was the first of its type in the U.S.