Harris Bank is negotiating with Houston developer Hines Real Estate Interests LP over a sale/leaseback of its headquarters for about $118 million, a rare instance of a low price reflecting a strong market.
Hines National Office Partners LP, a $2 billion venture between the real estate firm and the California Public Employees’ Retirement System, emerged from a crowded field of more than 15 bidders, sources said, a sign of the spirited demand for real estate assets anchored by high-credit tenants.
“Some companies who have been sitting on the fence on sale/leasebacks are deciding to jump in while the market remains extremely hot,” said Stephen Olsen, managing director of the sale/leaseback program at CB Richard Ellis Investors LLC, a Los Angeles real estate fund that was not a bidder.
But the typical sale/leaseback involves a single-tenant structure, and the Harris headquarters is a multitenant building, a key factor in the bank’s decision to sell, some observers say.
“It’s really more of an exit strategy for a real estate asset that’s going to have some [tenant] issues,” said Steven Stratton, managing principal in the Chicago office of Dallas-based tenant representative Staubach Co.
The deal would be the bank’s second sale/leaseback in a little less than three years. In 2001, Harris and Chicago-based John Buck Co. closed such a transaction for an operations center at 311 W. Monroe St. in a $29.2 million deal.
The outlines of the new deal were disclosed by sources familiar with the transaction. Thomas Danilek, a senior vice president in Hines’ Chicago office, declined to comment. A Harris spokeswoman said the price would be in the range of $118 million, but declined to comment further on the negotiations.
At that price, Hines and its joint venture partner would pay slightly less than $100 a square foot for a 1.2 million-square-foot complex that is more than 94 percent leased, according to real estate research firm CoStar Group.
After the sale is completed, the bank would lease about 650,000 square feet in the two-building complex, which has adjoining addresses of 111 W. Monroe St. and 115 S. LaSalle St.
There is a close connection between rent and property value: The higher the rent, the greater the value. And the ironic result of the deal–a relatively low price for such a well-leased property–is partly the result of the bank’s decision to focus on paying a low rent, rather than paying a higher rent and boosting the sales price.
In a twist on the traditional office building sale, Harris set the purchase price and asked prospective buyers to bid on the rent the bank would have to pay over a 20-year lease.
The exact amount of Hines’ proposed lease terms could not be determined, and they could change during negotiations of the complex transaction, sources said.
Harris was seeking a gross rent deal in which it would pay a fixed amount that would include taxes and operating expenses, a structure that shifts to the landlord the risk of increases in utilities costs and other expenditures.
Hines’ bid is based on a first-year net rent–the portion that goes into the landlord’s pocket–of just $11 a square foot, sources estimate.
However, Hines has particular expertise managing facilities for financial institutions, including ABN Amro Plaza in Chicago and Wells Fargo Center in Minneapolis.
The low sales price is also the result of other factors, aside from the bank’s drive to cut costs.
For example, Harris is asking for options that would shrink its rented space over the lease, adding to the potential risk taken by the successful bidder, sources said.
Already, Harris is reducing its space in the building to 54 percent from the 59 percent it currently occupies. The bank is asking for the option to cut its space by one-third after 10 years and another third after 15 years, the spokeswoman confirmed.
The bank complex is located in the Central Loop submarket, an area already hard hit by rising vacancy rates partly because of office space reductions by J.P. Morgan Chase & Co. and the departure of law firm Mayer Brown Rowe & Maw LLP to a new building at 71 S. Wacker Drive.
And a key Harris Bank tenant, Lord, Bissell & Brook LLP, has its own plans to move. The law firm, which has about 202,000 square feet, plans to leave in 2006 for a tower under construction at 111 S. Wacker Drive.
Replacing Lord Bissell with a new tenant could cost between $75 and $100 a square foot in renovations and other costs, an investment the bank would probably prefer to make in its business.
And there is also the risk that Harris’ second-largest tenant will also eventually move out. Law firm Chapman & Cutler LLP has 162,000 square feet under a lease that runs until 2010, CoStar says.
“Harris is protecting its occupancy costs,” Stratton said, “and getting rid of an asset that has tenant issues, and will potentially have more in the next five to seven years.”
“Who likes being a landlord in a soft market?” he asked.
