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CoStar Deals in the Works for July 30th - Aug. 5th

A Collection of Opportunities and Current Deals in the Works That Could Impact Your Business
July 31, 2006
United Airlines is moving its headquarters to 77 W. Wacker Drive in Chicago's CBD where it will be taking about 130,000 square feet the 51-story building.
United Airlines is moving its headquarters to 77 W. Wacker Drive in Chicago's CBD where it will be taking about 130,000 square feet the 51-story building.
This week's Deals in the Works highlights includes Birds Eye's view on its production facilities; First Industrial's joint ventures strategy; Jones Lang LaSalle's bonus pool; Denny's plan to sell 84 of its corporate-owned restaurants; real estate returns in general and reports on an assortment of other news we hope can benefit your bottom line.

Five Facilities Out of View for Birds Eye

Frozen foods supplier Birds Eye Foods will be exiting the vast majority of its non-branded frozen business during the next 12 to 18 months, and plans to sell five related production facilities.

The non-branded frozen facilities it plans to sell are located in Brockport, Bergen and Oakfield, NY; Fairwater, WI; and Montezuma, GA. In total, these facilities employ approximately 740 full-time workers. In addition, the decision to exit the non-branded business will affect a number of administrative positions in offices in Rochester, NY, and Green Bay, WI. The company's research and development facility will remain in Green Bay.

Another impact of this decision will be the closure of the Birds Eye facility in Watsonville, CA, at the end of the calendar year. This facility employs approximately 550 workers

"Our non-branded frozen business, with its lower margins, utilized resources which now can be freed up to drive brand growth and to compete more aggressively with competitors who are not producing non-branded lines," said Neil Harrison, Birds Eye Foods chairman, president and CEO.

Birds Eye Foods is the largest company in the branded frozen vegetable category, but is the only remaining branded manufacturing company having a significant non-branded presence.

"We'd like to sell these facilities as ongoing businesses," Harrison said, "because that would be in the best long term interest of our current employees who work there as well as our customers and suppliers."

Birds Eye Foods has already received a number of unsolicited inquiries about its non-branded frozen business and facilities, and will be exploring those and other alternatives in the coming weeks. Any facility not sold after its current production season will be closed between October 2006 and June 2007.

First Industial Looking for Boost from International Trade

Joint ventures have become an increasingly important part of First Industrial Realty Trust's strategy. The REIT just formed a new joint venture, FirstCal 3, LLC, with the California State Teachers' Retirement System (CalSTRS).

The new venture will invest in strategic land sites and the construction of industrial buildings in targeted coastal and inland ports, as well as markets that are forecasted to grow from:

* Expanding international trade,
* Increasing populations as the result of demographic trends, and
* Supply chain reconfigurations.

The total investment capacity of the new venture is approximately $950 million. The expected capitalization is 35% equity and 65% debt. CalSTRS has agreed to contribute equity up to $300 million initially and First Industrial has agreed to contribute up to $33 million, representing a 90% and 10% equity interest, respectively.

As venture manager, First Industrial will receive fees for development, property management, leasing, dispositions and portfolio administration. In addition, First Industrial has the opportunity to earn performance-based incentives. The initial term of the venture is 10 years. As properties are sold, capital may be reinvested back into the fund. In addition, the venture may be expanded up to $1.6 billion once the initial $950 million investment level has been reached.

"Since the beginning of last year, we have added nearly $4 billion in new investment capacity through co-investment programs with large private capital providers," said Mike Havala, First Industrial's CFO.

The new joint venture has arranged an initial credit facility with WestLB AG, New York branch. CB Richard Ellis Investors is the advisor to CalSTRS on this venture, as well as two other ventures between CalSTRS and First Industrial.

That's Some Bonus!

Jones Lang LaSalle's money management business recently disclosed a $109.5 million incentive fee in the second quarter of this year. LaSalle Investment Management recognized the bonus from one unnamed client and resulted from a final asset portfolio valuation that was completed at the end of the quarter. The values of the assets, which were supported by independent third-party valuations, were significantly higher than expected due to the strong performance of the portfolio. The fee covered an eight-year period ending June 30.

LaSalle Investment Management's overall revenue for the first half of the year increased from $79 million to $234 million.

Incentive fees can vary significantly from period to period due to both the performance of the underlying funds' investments and the contractual timing of the measurement period. LaSalle Investment Management's assets under management grew to almost $37 billion at the end of the second quarter of 2006 compared with $28 billion a year ago.

Denny's Putting 84 Eateries Up for Sale

Denny's plans to sell 84 restaurants it owns but leases to franchisee operators. The restaurant chain amended its credit agreements to allow for the sale of the 84 properties and plans to use the exected net cash proceeds from any sale to reduce outstanding indebtedness under that credit facility.

Denny's initial sales efforts began with the franchisees that operate the respective restaurant properties. The first of these agreements closed in late June, with an additional two properties sold in July for gross proceeds of approximately $2.4 million. Additional potential sales to franchisees may be limited, however.

The total annual rental from the properties is about $7 million, low compared to the going market rate. Hence, there is a disincentive to operators to forgo leasing in favor in purchasing the properties. In addition to further sales directly to franchisees, discussions have been held with various third parties that have expressed an interest in purchasing a portion of these properties and the associated lease income.

"Our focus on strengthening our balance sheet and enhancing cash generation is supported through targeted asset sales and strict allocation of capital expenditures," said Mark Wolfinger, CFO of Denny's. "The execution of our real estate sale plans is underway, marked by the divestiture of 13 surplus and operating properties through July for proceeds of approximately $14 million."

"While we would like to complete this sale process promptly," Wolfinger continue, "there are logistical challenges involved in negotiating with more than 30 separate franchisees or with third party due diligence on this number of prospective tenants. Until we have definitive sale agreements on the properties, we cannot predict with certainty the timetable for completion. It is our hope that the majority of these properties will be sold within the next 12 months."

Denny's officials said they were expecting to sell the properties at cap rates of from 7.5% to 9.5% and receive proceeds of between $75 million to $95 million.

CalPERS Best Returns Come from Real Estate

The California Public Employees' Retirement System (CalPERS) earned a 12.3% return on investments for the one-year period ended June 30, before investment management fees. It marks the third straight year the pension fund earned double-digit returns.

CalPERS real estate portfolio was the biggest percent gainer among asset classes, returning 38.4% for its investments in office, retail, apartment and industrial assets, and 36.5% for housing, land, and California urban real estate investments.

By comparison, the NCREIF industry benchmark earned 20.2%.

"Our annual performance figures represent dollars saved for public employers and employees since investment returns pay $3 of every $4 of our members' pensions," said Charles P. Valdes, chair of CalPERS Investment Committee. "Our diversified portfolio helped us weather what has been a volatile domestic public equity market in recent months, with strong performance again in real estate, international stocks and private equity."

Real Estate Returns May Not Be So High Next Year

While plenty of investment capital continues to chase real estate, rising long-term interest rates and lofty asset values appear to be having a cooling effect on overall investment activity, Prudential Real Estate Investors (PREI) reported in its midyear U.S. Quarterly outlook.

PREI expects that investment returns have peaked and will begin to moderate through the rest of 2006 and into next year. PREI continues to expect total returns on private, unleveraged real estate investments, as measured by the NCREIF Property Index, to be in the 12% to 15% range in 2006.

"Real estate fundamentals have continued to improve as the economy has expanded and while transaction activity continues at a fairly brisk pace, the market appears to be slowing from its somewhat frenzied rate of recent years," said Youguo Liang, managing director and head of PREI Research "The balance of power seems to be shifting slightly in favor of buyers."

Higher interest rates so far appear to be affecting transactions involving secondary markets and inferior-quality properties.

"Increasing long-term interest rates have affected the multifamily market more than any other," Liang said. "Higher mortgage rates have made home ownership even less affordable after several years of home-price appreciation. Additionally, condo conversion rates have slowed dramatically except in a few markets with high demand."

Those dynamics, according to the report, are contributing to strengthening tenant demand and double-digit rent gains in several markets, particularly in coastal areas.

In the property markets, retail is the only sector where transaction volume has declined year-over-year, off by about one-third compared with the first five months of 2005 amid concerns about consumer confidence and energy costs. Investors have shifted from retail to industrial and apartment sectors.

Panera Signs Expansion Deals

Panera Bread signed additional area development agreements with several of its franchisees. The expansions represent commitments for a total of 33 new bakery-cafes.

Doherty Breads, which currently operates 12 bakery-cafes in Long Island, has an existing agreement to open 20 bakery-cafes in the Long Island market, as well as an additional agreement for 11 bakery-cafes in Queens. The group, headed by franchisee Ed Doherty and operations partner Greg George, has signed a new development agreement for 12 additional bakery-cafes in the Staten Island and Brooklyn markets in New York -- the first of which is scheduled to open in 2007 Additionally, the group has signed a new development agreement for five additional bakery-cafes in the Long Island market

Covelli Family LP, which currently operates 26 bakery-cafes in the Orlando market, has completed its original area development agreement. The group, headed by franchisee Al Covelli and operations partner Gavin Ford, has signed a new development agreement for an additional eight bakery-cafes.

Fenwick Group, which currently operates 30 bakery-cafes in Northern New Jersey, has an existing agreement to open 40 bakery-cafes in that territory. The group, headed by franchisee Jim Nawn and operations partner Mark Brownstein, has amended its existing development agreement to include an additional three bakery-cafes to be located in its current market

Show Me Bread, which currently operates 11 bakery-cafes in the Winston-Salem/Highpoint market in North Carolina, originally had an existing agreement to open 12 bakery-cafes in that territory. The group, headed by franchisee Greg Anderson and operations partner John Bartlett, has amended its existing development agreement to include an additional three bakery-cafes.

Take Home the Bread, which currently operates five bakery-cafes in the Westchester/Rockland market in New York, has an existing agreement to open 20 bakery-cafes in that territory. The group, headed by franchisees Don Harty and Frank Levy and operations partner Tony Diaz, has amended its existing development agreement to include an additional two bakery-cafes to be located in the Bronx.

Navy Looking at Options for 34 Properties

The U.S. Navy awarded Alvarez & Marsal Real Estate Advisory Services a 5-year (including four option years) contract to serve as the Navy's sole advisor for its Enhanced Use Leasing (EUL) Program. The Navy has identified at least 34 potential EUL projects to pursue over the next three to four years.

Since being amended by Congress five years ago, the Department of Defense's EUL, is used to attract private sector capital and expertise to acquire, construct or upgrade military facilities and related infrastructure.

EUL allows DoD to out-lease underutilized land and facilities to non-federal government entities in exchange for cash or in-kind consideration equal to the fair market value of the out-leased property.

The Navy's goal is to use EUL as an asset management tool for reducing costs and generating (in-kind) revenue from underutilized real property.

The Public Sector Group of Alvarez & Marsal will lead the two-phase engagement from its Washington, DC, office. Alvarez & Marsal, which also holds EUL contracts with the Army and Air Force - the only firm to do so with all three military components - was selected over seven other firms for this contract.

United Lands on Wacker

United Airlines, the nation's second-largest airline, is moving its headquarters to 77 W. Wacker Drive (pictured), the landmark 959,719 square-foot Class A office tower in Chicago's central business district and one of Prime Group Realty Trust's premier properties. United will be taking about 130,000 square feet the 51-story building, which up until this deal had about 516,513 square feet available for lease at an average asking rent of $23.88 per square foot.

United Airlines has been seeking to consolidate its suburban Chicago facilities into an operations center on its Elk Grove campus.

United is receiving $5.25 million in tax increment financing from the city of Chicago and $1.35 million in grants from the Illinois Department of Commerce and Economic Opportunity for infrastructure improvements and job training. Additionally, both the city and the state will propose legislation to cap the jet fuel tax for the next five years.

David Matthews, Steve Stratton and Molly Carroll of The Staubach Co. represented United Airlines.
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