Firm Bulks Up Real Estate Practice with Sale-Leasebacks

As reported in the Legal Intelligencer on January 23, 2007, Klehr, Harrison, Harvey, Branzburg has bulked up their real estate practice with sale-leasebacks.


Klehr Harrison is building an expertise in sale-leaseback deals that started after helping client Sun Capital Partners Inc. acquire several department and grocery stores in separate deals.

The sale-leaseback allows a company to sell a bulk of its real estate in order to move assets off its balance sheet and put the capital back into the business more quickly.  At the same time the company leases back the property from the buyer, continuing to run its business from the site.

Bradley A. Krouse, chairman of Klehr Harrison’s real estate department, said the 34-lawyer practice group handled more than $1 billion in sale-leaseback deals in 2006. 

The firm has always represented the seller in these deals, he said, with one of the largest uses of the transaction being Sun Capital.

It was through a deal for the private-equity company from which the biggest chunk of the $1 billion in sale-leaseback came.

In June, the firm handled an $815.3 million sale-leaseback for Sun Capital of 178 department stores in the Midwest.  The firm, along with Morgan Lewis & Bockius, helped put together the acquisition six months earlier that brought those stores under Sun Capital’s ownership.

The sale-leaseback was thought by many analysts to be the largest in U.S. history at that time.

According to a market analyst, a lot of companies look at the sale-leaseback setup as a great source of growth capital.  He said it would start to become all the more common with the value of buildings at record highs and interest rates rising.  Krouse said he has noticed clients increasingly turning to sale-leasebacks over the past few years.

They have always been a tool for companies looking to get liquidity out of their real estate, and are used more or less frequently depending on the economy, he said.

In 2005, sale-leasebacks were at an all-time high, with companies together closing just under $12 billion worth.  The 2006 total was less, at around $10 billion, but that is still a lot in comparison to the $2.6 billion in sale-leasebacks that were completed in 2001.

At the end of last year, Krouse completed another sale-leaseback for Sun Capital.  The firm helped close a $220 million deal for a company affiliate, MSH Supermarkets Inc.  The supermarket chain sold and leased back 30 of its stores that averaged about 50,000 square feet each.

There are risks to both sides when entering into a sale-leaseback, such as the tenant being stuck in a long-term lease that it can’t get out of or the company going under, leaving the landlord in trouble. 

Companies who may want to maintain ownership of their property would be ones that do not plan to expand beyond their current space or ones that do proprietary work, like pharmaceutical companies, which may need to build out the buildings or have special security needs.

Michael Sklaroff, who heads up the real estate department at Ballard Spahr Andrews & Ingersoll, said sale-leasebacks really go back to department store chains that wanted to free up the illiquidity of all of their real estate.

When talking to The Legal, Sklaroff referred to a Pennsylvania Bar Institute program on venture financing in which he participated in 1987.  Sale-leasebacks were a big part of the program back then, he said.

The use of the tool to free up liquidity ebbs and flows, Sklaroff said, adding that the market was chilled in 2003 and 2004 from accounting changes made after the Enron scandal.  That has changed, he said, with activity picking back up.

He said his firm’s real estate department has several attorneys who can handle sale-leasebacks.  Ballard Spahr has handled more than $4 billion in sale-leaseback deals for a “major financial player” over the last few years, Sklaroff said.

Herman C. Fala, chairman of Wolf Block Schorr & Solis-Cohen’s real estate department, said his firm has handled some sale-leasebacks for repeat clients over the years.  He said, however, that he hasn’t noticed any major uptick in the use of the tool.

While it isn’t Wolf Block’s style to create sub-groups for areas as specific as sale-leasebacks, Fala said it might be a smart idea to market that way.

Krouse said there is talk about additional changes to accounting rules that may have an affect on the use of sale-leasebacks, but he doesn’t anticipate the use of the tool to come to a stop.

Klehr Harrison is looking to bulk up in that area on both the real estate and structured finance sides, he said.  The regional firm has been expanding this practice nationally and is starting to do sale-leaseback work in Germany, France and England as well, he said.

Krouse isn’t the only attorney at the firm to handle those types of deals.  Stephan L. Cutler and Gregory G. Gosfield are also big players within the firm, he said.  The group recently finished a 10-store sale-leaseback for Boscov’s, Krouse said.

Klehr Harrison hopes to cross-sell its growing expertise in the area to its corporate clients who can understand the value of getting liquidity out of its real estate, Krouse said.

As a whole, the firm’s real estate group is expanding into several sub-specialties, he said.  When name partner Leonard M. Klehr took a position with one of the firm’s largest clients, real estate fund Lubert-Adler, it opened the practice to a national presence, Krouse said.

The firm now handles student-housing deals across the country and hospitality deals in Mexico and the Caribbean, he said.

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