Challenge
Avery Dennison, a publicly traded company that specializes in developing labeling and packaging materials and solutions occupies a 220,000 square foot administrative and R&D facility in Mentor, OH, which was constructed by the Cleveland-Cuyahoga County Port Authority (the Port) and financed using Port bonds and proceeds. The Port Bonds were structured to pay interest only for a 10-year lease term with a balloon payment at maturity. Based on the property valuation prepared by Avery Dennison’s service provider, the balloon payment would exceed the property value by more than $20M. In the spring of 2014, the company engaged Allegro to lead the executive team through a strategic process to evaluate the myriad of options available to address the substantial balloon payment and potential financing gap that was looming.
Solution
Upon review of the existing appraisal, Allegro identified a number of issues that seemed to result in an artificially deflated valuation of the property. Allegro selected and managed a second appraiser to provide another property valuation opinion. The second appraiser found the property value to be much higher than the value provided by the first appraiser, reducing the financing gap by more than 50% to $10M.
Simultaneously, Allegro pursued three potential options for retiring or re-casting the outstanding debt: re-financing with a new bank, re-financing with the Port, and a sale-leaseback with a third party investor. Allegro interviewed a number of lenders, specializing in single-tenant, owner-occupied properties that would have the capability to lend on the scale needed to satisfy the balloon payment. Allegro also interviewed local and national buyers of investment properties with credit-tenant leases to better understand how an investor might view the potential cash flow in comparison with the residual property value. These interviews provided the framework for comprehensive discounted cash flow and sensitivity analyses that ultimately informed the client’s decision.
Allegro developed a cash flow model that took into account more than two dozen variables to compare the three options, including interest rates and terms in the lending market, investor/developer required returns for a sale-leaseback transaction, the client’s future lease structure, transaction costs for each option, etc. The cash flow model was used to develop a sensitivity analysis that compared 21 different refinance and sale-leaseback scenarios based on four metrics: first year annual occupancy costs, average annual occupancy costs over the term, before-tax net present value and after-tax net present value. Ultimately, the analysis made it clear that a re-finance with the Port was the most prudent option.
Allegro was able to leverage its strong team of diverse skill sets and deep market knowledge to develop a complex set of analyses that simplified an extraordinarily impactful real estate decision. The client’s executives were able to clearly and quickly identify the opportunities and challenges related to each scenario from operational cash flow and accounting perspectives to make right decision for the company.
