Firms that have to decide to lease or own space they may occupy have a large variety of financial options that have direct impact on their bottom line. This presentation demonstrates the financial impact of all the various options, within both ownership and lease executions, and how JLL’s Corporate Finance Team can help any firm discover the most valuable outcome. Learn more by visiting: http://www.us.jll.com/united-states/en-us/midwest-capital-markets

1. Tapping Into
Hidden Potential
Using the balance sheet to lower your occupancy cost
April 2014

2. To Lease or to Own?

3. Driving Value
2
Determinants of Corporate Real Estate Value
RentEscalations
CorporateGuarantee
Mastervs.IndividualLeases
StructuralObligation
EarlyTermination
ROFO/ROFR
Assignment/Subleasing
RentEscalations
CorporateGuarantee
Mastervs.IndividualLeases
StructuralObligation
EarlyTermination
ROFO/ROFR
Assignment/Subleasing
FixedFixedCPICPI FixedFixedCPICPI
YesYesNoNo YesYesNoNo
MasterLeaseMasterLeaseIndividualLeaseIndividualLease MasterLeaseMasterLeaseIndividualLeaseIndividualLease
BondableBondableNNNNNN BondableBondableNNNNNN
NoNoYesYes NoNoYesYes
NoneNoneYesYes NoneNoneYesYes
NoneNoneTenantControlledTenantControlled NoneNoneTenantControlledTenantControlled
MinimizesValueMinimizesValue MaximizesValueMaximizesValue
RentEscalations
CorporateGuarantee
Mastervs.IndividualLeases
StructuralObligation
EarlyTermination
ROFO/ROFR
Assignment/Subleasing
RentEscalations
CorporateGuarantee
Mastervs.IndividualLeases
StructuralObligation
EarlyTermination
ROFO/ROFR
Assignment/Subleasing
FixedFixedCPICPI FixedFixedCPICPI
YesYesNoNo YesYesNoNo
MasterLeaseMasterLeaseIndividualLeaseIndividualLease MasterLeaseMasterLeaseIndividualLeaseIndividualLease
BondableBondableNNNNNN BondableBondableNNNNNN
NoNoYesYes NoNoYesYes
NoneNoneYesYes NoneNoneYesYes
NoneNoneTenantControlledTenantControlled NoneNoneTenantControlledTenantControlled
MinimizesValueMinimizesValue MaximizesValueMaximizesValue
Lease StructureGross Bondable
Purchase OptionYes No
HIGHEST CAP RATE LOWEST CAP RATE
Location
Property Condition
Lease Term
Tenant Credit
Property Class
25 years0 years
Investment-GradeSpeculative
Class C Class A
Tertiary Market Primary Market
Poor Excellent
Value Deterrents Positive Value Drivers

4. Lower Your Occupancy Costs
The Right Tool, The Right Opportunity, The Right Investor
Tool Lease Term Lease Rent Credit
Worthiness
Balance
Sheet
Vacancy Discount
Rate
Acquisition
Long-Term Sale
Leaseback
Acquisition Sale
Leaseback
Lease Buy Down
Tenant Led Build-
to-Suit
Short-Term Sale
Leaseback
Deal Packaging
Identifying your company’s leverage points can help determine which capital markets
tools can help tap into hidden value in your real estate portfolio.
3

5.  Potential to acquire at low basis
 Absolute control over property
 Reset depreciation of Leasehold Improvements
 Cease costly rental obligations
 NPV benefits if low cost of capital
Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Short Remaining
Lease Term
Excess Capital
Low Discount
Rate
Acquisition
Purchase a currently leased asset
ConsiderationsBenefits
 Asset goes on balance sheet
 Debt goes on balance sheet
 Not always most efficient use of capital
 Potential for losses if company no longer needs
building in the future (residual risk)
4

6. $21.4 Million Purchase Price
$200K NPV Benefit
$700K Annual Earnings Benefit
Acquisition
Purchase a currently leased asset
Client Situation
$1.1 Million Annual Cost Savings
 While each acquisition is different, a
recent acquisition yielded significant
savings for our client. The
transaction contemplated a 100K SF
asset with a net rent of $15 psf
purchased at a 7.00% cap rate.
 The client expected to use the
building for 15+ years and had a
discount rate of 5.00%
Financial Impact
5

7. Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Can Accept Long
Term
Investment
Grade
High Discount
Rate
Long Term Sale Leaseback
Sell property for upfront proceeds, but retain long-term control
 Preserve capital
 Monetize asset to generate capital and redeploy
 Remove assets from balance sheet
 Structured to meet key objectives
 Enhance occupancy flexibility
 Transfer residual risk exposure
ConsiderationsBenefits
 Credit and lease term drive pricing
 EBITDA Impact
 NPV benefits greatest for companies with high
cost of capital
 Strategic nature of asset
 Need for future capital improvements
6

8. Earnings Neutral Transaction
Alleviate Residual Risk
$18 Million Day 1 Net Proceeds
$3.1 Million NPV Benefit
Long Term Sale Leaseback
Sell property for upfront proceeds, but retain long-term control
 Clients executing long term sale
leasebacks include Walgreens, Citi,
EDMC, and AT&T, among others.
 Cap Rates on these types of
transactions are at historic lows,
making now an ideal time for
corporate occupiers to consider this
strategy
 This example considers a 100K SF
asset leased for 15 years at a net
rent of $15 psf.
 The client had a discount rate of
10.00%, an annual depreciation
expense of $5.33 psf and re-
deployed the proceeds at a 5.00%
return.
Client Situation Financial Impact
7

9. Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Has Short Term,
Can Do Long
Term
Investment
Grade
High Cost of
Capital
Acquisition Sale Leaseback
Purchase a currently leased asset and perform a sale leaseback, taking advantage of cap rate arbitrage
 Potential to acquire at low basis
 Generate upfront proceeds or lower long term
occupancy costs by utilizing cap rate arbitrage
 Choose new landlord
 Utilize credit to drive down rent
 Utilize credit to increase cash
ConsiderationsBenefits
 Prevents title from passing to tenant
 Sale leaseback generally performed “off-market”
 Less likely to receive tenant improvement
allowance than standard lease extension
 Option to sell leasehold improvements
8

10. Better Lease / New Landlord
$400K Annual Earnings Benefit
$6.0 Million NPV Benefit
Purchase Price = Sale Price
Acquisition Sale Leaseback
Purchase a currently leased asset and perform a sale leaseback, taking advantage of cap rate arbitrage
 JLL recently executed an acquisition
sale leaseback for a client seeking to
enter into a new lease with a new
landlord, and also monetize
significant leasehold improvements
 110 K SF facility highly specialized
for client’s use
 8.00% client discount rate
 Significant financial benefits were
realized through the monetization of
leasehold improvements
Client Situation Financial Impact
Monetized $28M of LH Improvements
9

11. Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Above Market
Speculative
Credit
Excess
Capital
Low Discount
Rate
Lease Buy Down
Buy down the remaining rental obligation in an existing lease
 Reduce rental cost to market rate
 Hedge against the risk of a future impairment if the
facility becomes surplus
 Decrease carrying cost of lease space in order to
facilitate subleasing at market
 Deploy capital
ConsiderationsBenefits
 Utilize available, low-cost company capital to buy-
down an existing lease obligations where the
landlord’s return expectation is higher than the
company’s cost of capital
 Buy Down payment against taxable income
 Requires cash upfront which may increase
company debt
10

12. 70.24 PSF Buy Down Payment
$28 PSF Earnings Benefit (10 years)
$6.91 PSF NPV Benefit
Reduced Rent $10 psf annually
Lease Buy Down
Buy down the remaining rental obligation in an existing lease
 The client in this example had sub-
investment grade credit but cash
available to deploy
 8.75% discount rate
 10 years of term at $20 psf
 The rent was reduced $10 psf
annually
 Based on an investor IRR
requirement of 7.00%, the buy down
payment was $70.24 psf
Client Situation Financial Impact
11

13. Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Long Term
Investment
Grade
Desire to Re-size
/ Re-locate
High Discount
Rate
Tenant Led Build-to-Suit Lease (Vs Developer Led)
Leverage strong company credit and relationships to achieve optimal pricing while building a new facility
 New facility designed to company’s standards
 Reduce operating expenses through efficiencies
 Densify to modern standards / reduce sf
 Ability to fund entire project cost, including Tis
 Potential to receive state or local incentives
 Present value savings on lease payments
ConsiderationsBenefits
 Ability to manage incentive process
 Ability to manage developer
 Requires long term lease
 Site selection can be difficult if developer
controlled
 Lease classification scrutinized by underwriters
12

14. Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Term will provide
higher sale price
Short Term Sale Leaseback
Sell and lease a property back for less than 5 years
 Generate higher sale price than vacant sale
 Allows buyer to pass reduced stabilization costs to
seller through increased sale price
 Minimize loss on assets where long term
occupancy is not anticipated
 Maintain space flexibility
ConsiderationsBenefits
 Leaseback terms of five years or less are viewed
as a staged exit and price conservatively
 Market dynamics and real estate fundamentals
effect pricing more than a long term SLB
 Eye on the balance between deprecation and rent
 Strategically developing a story around renewal
probability can significantly impact proceeds
13

15. Points of Leverage
Lease Term Lease Rate
Credit
Worthiness
Balance Sheet Vacancy Discount Rate
Mix of Long &
Short
Flexibility
Investment
Grade
Under Utilized
Space
High Discount
Rate
Deal Packaging
Enhance pricing and mitigate GAAP losses by packaging low yield plays with high yield plays
 Generates sale proceeds and allows redeployment
of capital into core competencies
 Control over allocations of gains and losses
 Allows for disposition of unwanted space while
minimizing upfront GAAP losses
 Right-size portfolio space, lower occupancy costs
ConsiderationsBenefits
 Need to sell dominant share of long term assets
to offset vacant and short term asset losses
 Can be structured in a variety of ways to fit the
company’s needs and optimize the portfolio as a
whole
 Individual property sale value must be at fair
market value
14

16. To Lease or to Own?

17. You Can Find
the Answer with
JLL’s Corporate
Finance Team

18. © Copyright 2014 Jones Lang LaSalle
Bruce Westwood-Booth
Managing Director,
Corporate Finance
Chicago, IL
+1 (312) 228-2966
bruce.westwood-
booth@am.jll.com
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