How to decide whether or not to own your factory or warehouse

Howard N. Greenberg, managing member, Semanoff Ormsby Greenberg & Torchia, LLC

Howard N. Greenberg, managing member, Semanoff Ormsby Greenberg & Torchia, LLC

You’ve been in business for several years and it is profitable. You have a decision to make: Do you want to invest in the business and buy a facility, or will you continue to lease?

With the help of your accountant, you should carefully examine the anticipated capital requirements of your business.  Evaluate your ability to obtain capital or loans. Don’t box yourself into being cash poor and unable to meet business obligations or take advantage of opportunities.

“The prevailing reason that businesses fail is insufficient capital. Draining capital to pay for a real estate project could be a cause,” says Howard N. Greenberg, managing member at Semanoff Ormsby Greenberg & Torchia, LLC.

“My colleague, Jeffrey Rosenfarb, a principal in Hart Corporation, a national industrial real estate firm, advises that small manufacturing firms overwhelmingly desire to own versus rent, whereas larger corporations generally prefer leasing.”

Smart Business spoke with Greenberg about some pros and cons of leasing or purchasing industrial real estate.

What issues should be examined when considering purchasing a facility?

First, what’s the nature of your business?   Manufacturing that utilizes heavy, difficult-to-move equipment is where purchasing may be desirable, to avoid being at a landlord’s mercy when your lease expires. Or is it light manufacturing or distribution, that moves easily?

Second, can you obtain a facility that will remain adequate for your needs? Plan for potential future expansion. Have your counsel review the local zoning code to determine what can be built, either now or in the future.

Do you contemplate children in the business? Real estate can provide a source of income and inheritance. Counsel will need to prepare an agreement that deals with numerous issues including governance, death, disability, termination of employment and sale of the business.

Where do you want to invest your limited capital? Be sure that you will not need capital to expand your business versus acquiring a building. Lending rates are at historic lows, encouraging acquisition. Consult counsel concerning special types of financing such as tax free industrial development or state-provided financing, as well as tax abatements.

What issues should you consider if you determine to lease?

Check locally to ensure there are adequate reserves of industrial rentals available. With any lease, secure options to: extend the term; terminate early; purchase the building; for a right of first refusal; and for the ability to assign the lease or sublet in connection with your business sale.

If I decide to purchase, what entity should purchase the property, and how should the lease be structured?

Keep the building owner entity distinct from the entity that occupies it. The building owner entity should be a limited partnership, limited liability company or S corporation to enable you to utilize tax advantages like depreciation and amortization, and to permit gifting. Also, you may want to divvy up interests differently in the operating company versus ownership in the real estate company. You could decide to bring a partner into your business, but not into the building ownership.
You will need a lease between the two entities, especially if you’re going to sell the business and not the real estate. As a landlord, limit the tenant’s options and set a reasonable term.

Does new construction make sense versus purchasing and rehabbing an existing building?

With new construction or significant rehab, you must have a reliable contractor and architect. Assume that it’s going to cost at least 15 percent more and take 15 or 20 percent longer than initially estimated. Weigh the aggravation of new construction versus having your building the way you want. However, over the past 15 to 20 years, sale or leasing of existing facilities has far exceeded new construction, per Rosenfarb.

Buying and holding an industrial property usually works out well for the owner. For heavy manufacturing, building ownership, or a long-term lease with renewal options, is the way to go.

Howard N. Greenberg is a managing member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 and [email protected]

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

China’s appetite for pork spurs $4.7 billion Smithfield buy

NEW YORK, Thu May 30, 2013 — Shuanghui International Holdings is buying Smithfield Foods Inc., the world’s biggest hog producer, for $4.7 billion to feed a growing Chinese appetite for U.S. pork, in a deal that has stirred concern among U.S. politicians.
Announced on Wednesday, the takeover would be China’s biggest of a U.S. company, with an enterprise value of $7.1 billion, including debt, and follows a call by Smithfield’s largest shareholder, Continental Grain Co, to break up the company. Continental could not be reached for comment on Shuanghui’s proposal.
The deal highlights China’s growing appetite for protein-rich food, particularly pork, as its middle class expands, making China more reliant on foreign producers.
“I think this is a move by China to make sure their population is going to get fed in a cheaper manner. It’s the right move for them,” said Brian Bradshaw, a pig producer with operations in Illinois and Indiana, who has sold hogs to Smithfield. “Time will tell whether it’s the right move for the rest of the pork industry.”
The deal will face scrutiny by the Committee on Foreign Investment in the United States, a government panel that assesses national security risks. At least one member of Congress said the deal raised alarms about food safety, noting Shuanghui was forced to recall tainted pork in the past.
“I have deep doubts about whether this merger best serves American consumers, and urge federal regulators to put their concerns first,” U.S. Representative Rose DeLauro, a Democrat from Connecticut, said in a statement.

Linn Energy to buy Berry Petroleum in $2.5 billion stock deal

HOUSTON, Thu Feb 21, 2013 — Oil and gas producer Linn Energy LLC will buy Berry Petroleum Co. for $2.5 billion in stock, boosting its reserves of lucrative oil and raising total output by about a third.

Berry shareholders will receive 1.25 shares of LinnCo. LLC, a company set up by Linn to raise money for acquisitions and other purposes. LinnCo, which went public in October, only owns Linn units and has no assets or operations.

Berry shareholders will get an equivalent of $46.24 per share based on LinnCo. stock’s closing price of $36.99 on Wednesday. This is a 19.8 percent premium to Berry’s closing price of $38.59.

Berry had 54.15 million shares outstanding as of Oct. 26. The deal is valued at $4.3 billion including debt, the companies said.

Berry shares rose 14 percent in premarket trade.

Linn’s offer is higher than Berry’s intrinsic value of $44.06 as measured by Thomson Reuters StarMine.

The StarMine model is a measure of a stock’s current value when considering analysts’ growth estimates for five years, and then modeling the typical growth trajectory over a longer period of time.

Nielsen to buy radio ratings firm Arbitron for $1.26 billion

NEW YORK, Tue Dec 18, 2012 — Nielsen Holdings NV, known for its television viewership ratings, agreed to pay $1.26 billion to acquire its radio counterpart, Arbitron Inc.

The $48-per-share purchase price represents a 26 percent premium to Arbitron’s Monday closing price on the New York Stock Exchange. The shares were trading just below the offer price in premarket trading Tuesday when the deal was announced.

Ratings — Nielsen’s in TV and Arbitron’s in radio — determine how much advertisers are charged to run commercials during TV programs and radio listening hours. The higher the rating — the more people watching or listening — the more expensive the commercial spot.

“It’s a huge deal for Nielsen,” said Edward Atorino, an analyst with Benchmark Co. “It adds radio, which is a huge market.”

Nielsen said that with Arbitron it plans to expand its “Watch” measurement that keeps tabs on consumer viewing and listening habits across multiple screens such as TV, computers and mobile devices.

Fiat CEO: plan to buy Chrysler shares

NEW YORK, Fri Dec 14, 2012 — Italian carmaker Fiat SpA fully intends to acquire the 41.5 percent of Chrysler Group shares that it does not now own, but wrangling over the price could continue for a while, Fiat-Chrysler chief Sergio Marchionne said on Friday.

Fiat is in arbitration proceedings with the owner of the shares, a United Auto Workers trust fund that pays medical benefits to retired workers. The trust fund acquired the shares during the U.S. government-sponsored bankruptcy and bailout of Chrysler in 2009, when Fiat gained an ownership stake and management control of the U.S. automaker.

“We’ve always taken the position that we would have to pay them, but the question is price,” said Marchionne, speaking on the sidelines of a meeting of the Council for the United States and Italy, an international-relations group. The current arbitration proceedings, he added, are “part of the dance.”

GE to buy 2,000 Ford plug-in hybrid vehicles

FAIRFIELD, Conn., Tue Nov 20, 2012 – General Electric Co. will buy 2,000 plug-in hybrid vehicles made by Ford Motor Co. for its corporate fleet, the companies said on Tuesday.

As part of the deal for the Ford C-Max Energi vehicles, the automaker said it would jointly market GE’s alternative fuel infrastructure technology, including charging stations and natural gas fueling stations, to its commercial buyers.

The agreement is Ford’s largest plug-in electrified vehicle fleet sale to date.

GE, the largest U.S. conglomerate, has set a target to convert half of its global fleet to alternative fuel vehicles. The purchase from Ford brings the number of such vehicles in GE’s fleet to more than 5,000, compared with its goal of 25,000.

In May, GE CEO Jeff Immelt said people might be disappointed in the adoption rate of electric vehicles, but his company would continue investing in battery technology to reflect its confidence in them.

Electric vehicles carry an expensive battery and typically cost more than a conventional vehicle of similar size. Sales of such vehicles thus far have been modest and below some initial expectations.

GE and Ford also said they would work with researchers from Georgia Institute of Technology to study GE employee driving and charging habits, with the goal of improving all-electric driving and charging performance.

Study findings will be shared with commercial customers to provide insights and help facilitate deployment of electric vehicles in their own fleets.

The C-Max Energi, which sells for nearly $30,000 after a federal tax credit, went on sale last month. It can drive about 21 miles in all-electric mode before a gas engine kicks in and gets the equivalent of 100 miles per gallon as rated by the U.S. Environmental Protection Agency.

Marathon to buy BP Texas City refinery for up to $2.5 billion

HOUSTON, Mon Oct 8, 2012 – Marathon Petroleum Corp. struck a deal to buy BP Plc’s Texas City refinery and related infrastructure for up to $2.5 billion, a purchase that will make Marathon the fourth-largest U.S. refiner and give it a bigger potential slice of the market for refined product exports.

Marathon said on Monday it had agreed to buy the 451,000-barrels-per-day refinery, the fifth-largest in the country, as well as the plant’s inventory, three intrastate natural gas liquids pipelines, four terminals and other assets.

The news sent shares in Marathon to a record high of $60.04 on the New York Stock Exchange. Since the stock began trading in June 2011, it has risen nearly 50 percent.

The base purchase price is $598 million, plus inventories estimated at $1.2 billion, Marathon said.

The agreement also contains a provision to pay up to $700 million more over six years, depending on the refinery’s profitability.

“The multiple is cheap, that’s why the shares of Marathon are up,” said Pavel Molchanov, an analyst with Raymond James. “Texas City has a rather complicated history and that alone has made the valuation of this deal lower than it would have been otherwise.”

The Texas City refinery was the site of a 2005 explosion, one of the worst industrial accidents in U.S. history. The blast killed 15 workers, injured 180 others and cost BP more than $3 billion to settle lawsuits and pay fines.

Buffett buys more shares in DaVita dialysis clinics firm

OMAHA, Neb., Mon Oct 1, 2012 – Warren Buffett has bought an additional 282,403 shares of DaVita Inc., the largest operator of dialysis clinics in the United States, according to a filing with the U.S. Securities and Exchange Commission on Monday.

Buffett, through Berkshire Hathaway Inc. is the largest shareholder in DaVita, owning now about 10 percent of the company’s stock.

Berkshire Hathaway bought the shares in multiple transactions at prices ranging from $100.42 to $103.76 between Sept. 26 and 28.

Berkshire Hathaway now owns 10.2 million shares in DaVita.

Columbia Banking to buy West Coast Bancorp for $506 million

TACOMA, Wash., Wed Sep 26, 2012 – Columbia Banking System Inc. said it would buy West Coast Bancorp for about $506 million to expand its footprint in Washington and Oregon, the latest in a slew of deals in the community bank sector.

There have been 5 deals by publicly listed community banks this month, with values ranging from $3 million to over $900 million. Industry experts have predicted an increase in small bank mergers in the next few years.

The combination of Columbia Banking and West Coast Bancorp would have about $7.2 billion in assets and over 150 branches. There are over 7200 banks in the United States, the vast majority of which have less than $10 billion in assets.

Columbia Banking said it would pay for the deal with $264.5 million in cash and 12.8 million shares.

West Coast shareholders can choose to receive payment in common stock, cash or a combination of the two.

Columbia said West Coast shareholders would receive about $23.10 per share, a 14 percent premium to the stock’s Tuesday close.

West Coast shareholders would own about 24 percent of the combined bank.

Columbia said the deal would add to its earnings per share immediately and that it would be able to cut about a quarter of West Coast’s operating expense base.

Columbia’s shares closed at $18.85 on the Nasdaq on Tuesday. West Coast’s stock closed at $20.18.

M&T Bank to buy Hudson City Bancorp in $3.7 billion deal

BUFFALO, N.Y., Mon Aug 27, 2012 –M&T Bank Corp. said it would buy Hudson City Bancorp Inc. in a stock and cash deal worth $3.7 billion, expanding its franchise in the eastern United States and taking a step toward the long-awaited consolidation of regional banks.

M&T intends to shrink Hudson City’s $43.6 billion balance sheet by roughly a third as it liquidates an investment portfolio held by the Paramus, New Jersey-based bank, M&T said on Monday.

The deal quickly won the endorsement of the market. Hudson City shares rose 16.3 percent in early trading to $7.49, and M&T stock rose 4.7 percent.

For Hudson City shareholders, the market move sweetened a 12 percent premium to the deal struck by the companies. Based on the Friday closing price of M&T stock, the deal was worth $7.22 for each Hudson City share.

M&T has $80.8 billion in assets and

said it expects to gain about $25 billion in deposits and $28 billion in loans from the merger, before adjustments.

The transaction is expected to immediately boost the combined company’s capital ratios, as well as its GAAP and operating earnings per share.

Hudson City Chairman and CEO Ronald Hermance will join the board of M&T after the closing of the deal, which is subject to approval by regulators and by shareholders from both companies.

M&T will acquire Hudson City’s network of 135 branch offices; 97 are located in New Jersey, with the rest in downstate New York and in Fairfield County, Connecticut. The companies said there is “very little overlap” with M&T’s branches.