2004 Bank of America
2004 CoreNet Global Innovator's Award
Bank of America’s "BIG DEAL"
Sale and Leaseback Strategy
Innovations in Corporate Real Estate
CoRE 2010 Tie-in: Portfolio Optimization and Solutions Delivery
There were several award finalists - including Whirlpool, RBS and Shell - who demonstrated that corporate real estate has earned a place at the senior management table. Add the Bank of America (B of A) to the list of companies now treating real estate as a strategic asset, and no longer strictly as a transactional necessity.
For Robert Patterson, B of A’s Senior Vice President, Corporate Workplace, and Transaction Management Executive, that strategic positioning was strengthened through a major portfolio optimization initiative known as the "BIG DEAL," the bank’s groundbreaking sale and partial leaseback of its wide-reaching real estate portfolio.
"A partial leaseback is an effective tool for connecting real estate and corporate strategy," observed Patterson, who has a track record of taking risks and delivering innovative solutions that add value and lower operating costs both within and outside of B of A.
Sure, Patterson’s " BIG DEAL " (a project name that he branded to facilitate communications among the multitude of people required to plan and execute a transaction of this magnitude ) was driven by the "What have you done for me lately" question from the CFO. But it was also spawned by larger needs stemming from the bank’s entry into a post-acquisition era. Following a series of mergers that ultimately led to the bank changing its name from NationsBank to Bank of America, Patterson pointed to a "shift from M&A to organic growth." Against that backdrop, "we had accumulated a hodge-podge of surplus space and we had no desire to be a landlord," he noted.
He cited a more than 10% decrease in the size of the bank’s portfolio betweebetween 1999 and 2003 but pointed out that vacancies continued to climb mainly because of unused surplus, or overhanging, space resulting from acquisitions within a portfolio totaling more than 70-million square feet. The vacancy issue – described as ‘Swiss Cheese’ from numerous small pockets of vacancies – created a fundamental problem compounded by weak market conditions. The problems were placing a multi-million-dollar drag on performance. "The issue was getting a lot of visibility from the top end of the company," Patterson recalled, realizing he would need the support of senior management.
"Traditional approaches to eliminating space were no longer sufficient," according to Patterson, whose next step was to present the C-Suite with a dramatic vacancy reduction proposal that included the corporate services partnership between B of A, the Trammell Crow Company and Jones Lang LaSalle.
The solution turned out to be the "BIG DEAL," and the formation of a new REIT structure to add the all-important elements of flexibility and reduced space to a financial institution now holding the largest share of the U.S. bank deposit and small business lender markets. Working with American Financial Realty Group, a new REIT known as American Financial Realty Trust was formed in 2003, which brought flexibility in two forms: responsiveness to changes in financial institutions' business plans and markets; and flexibility through a landlord/tenant provider-client relationship. The impetus provided the "seed to create an IPO for a new REIT," according to Curt Grantham of Trammell Crow. "This is a product being funded by the public market."
To date, B of A has sold 158 buildings to American Financial Realty and has leased back approximately 65% of the space over a 20-year time frame. The total lease value is over $2 billion, making it the largest transaction of its kind in the industry, according to FORTUNE magazine.
In the end, B of A is gaining flexibility, savings and control. Patterson pointed to these results:
• Flexibility within a leased environment
• Mimics a bondable lease structure
• Long-term renewals and price protection
• Preferential rights
• Ease of property management
• Outstanding cost savings
• Space reduction
• Great exit strategy
• Transparency for users
Grantham advised that the complexity of the deal meant not every "I" was dotted and every "T" was crossed but that forging ahead with the new model was most important. "Size (of the deal) is not a determiner of speed. Don’t expect to be able to get everything done but keep moving ahead and complete the deal." Patterson echoed, "Speed is essential. Do your due diligence, but build momentum (for support of the deal). Know your short- vs. long-term business needs, and set a time line, then stick with it, but don’t back off. Think big and bold, and think network – collaborate."
Patterson also observed that the "BIG DEAL’s" structure helped solve the classic real estate contradiction: "We live in a three-year business plan with a seven-year lease world." Unraveling the contradiction also meant the end to another real estate paradox: "Real estate is one of the least flexible parts of a company’s financial model," Patterson offered. "Now we know that’s no longer necessarily true."
– Richard Kadzis