July 2004 | Commentary | EcoDev

Making a Bid for Real Estate Auctions

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Over the past several years, millions of square feet of manufacturing and distribution space have been rendered obsolete as technology advances create the need for new production facilities, and the economy continues consolidation and repositioning of corporate-owned real estate.

Consequently, the need to accelerate the sale of large surplus assets has created a surge in real estate auctions.

A recent example is Intel's decision to sell a surplus chip manufacturing plant outside San Juan, Puerto Rico. Faced with 428,000 square feet of space and 68 acres, Intel used, for the first time, a real estate auction program, which attracted users and re-developers throughout North America. The real estate auction company "re-created" logistical uses for the facility in order to maximize values to market price, designed a plan to stop cost of carry, and sold the asset in 10 weeks.

Here are five good reasons why the use of real estate auctions is increasing:

1. If time and price are equally important, then the auction strategy can be more effective than conventional strategies.

2. Auctions allow the seller to attract all markets and buyer types simultaneously, within weeks. For instance, a seller might have identified a market or property type that better suits its operations, and therefore wishes to sell the facility. Consequently, a similar user for the facility may not be practical for the same reasons.

The auction's mission, in this case, is to "make a market" for the property by attracting alternative users and applications, and provide the owner with a competitive bidding situation to define value at the top price. Auctions facilitate pre-qualified buyers for cash. Marketing is aggressive to accomplish these goals.

3. Corporate decisions to vacate major facilities and thousands of jobs affect the economy on local and regional levels. Consequently, local and state legislation creates pressure on owners to sell facilities quickly, thereby re-establishing the job market and tax opportunities.

4. Owners recognize that the cost of carrying a vacant facility is most often not recoverable, so promoting a timely sale is most beneficial.

5. As corporate America sheds jobs, fewer real estate technicians are available in-house to sell these increasing portfolios. Consequently, corporate real estate technicians are outsourcing some responsibilities.

In another example, BP/Amoco auctioned 47 properties that were surplus to its merger transaction. BP marketed the properties conventionally for several years. Many properties had environmental challenges, which were difficult to overcome through conventional programs. These programs provided contingencies for time, during which buyer and seller were to quantify the environmental problem, come to terms with the EPA, and establish remediation solutions.

In BP's case, the auction process solved the following problems:

1. Conventional purchase contracts are usually signed before any due diligence is completed. Reasonable time periods, which provide for due diligence, typically expire and the buyer is out of the deal. Months can often go by, and the transaction stagnates. With an auction, due diligence is prepared ahead of the sale. There is little need for contingencies and buyers are more comfortable with their purchase.

2. The auction program facilitates a structured timeline, during which all parties—environmental agencies, seller, and purchaser—must conform.

3. It can be difficult for a buyer to get financing for properties, which are difficult to value. While conventional marketing might attract one or two buyers, the auction program procures many bidders, providing support for value through competitive bidding.

Real estate continues to move from a secondary to a primary consideration on the corporate balance sheet.

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