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The Associated Press reports [via Yahoo!] that GM has just spent $626m of its dwindling cash pile to purchase its Renaissance Center office building, and another $200m cash to buy office buildings in nearby Pontiac, Michigan. Incroyable! Just yesterday, we learned that Fitch Ratings estimates GM will burn through $8b in cash in '08. THEN we heard that the American automaker has set aside $200m to pay off the striking workers at American Axle. Delphi's not a done deal. AND one wonders if GM's going to fork out $600m to GMAC to keep the mortgage lender afloat. The Volt development program (and the rest) are sucking up the capex bucks. In short, is this really the best time to be shelling-out millions to reduce the rent? We're thinking… no.
28 Comments on “Why Build Better Cars When You Can Invest in Detroit Real Estate?...”
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Ring-fencing.
I wouldn’t like to be in a position where GM owed me money.
$2m per year rent or $626m up front in one of the poorest major real estate markets in the US. That’s smart I say.
GM had residual value guarantees to the lessor on the lease to their HQ. Must’ve been cheaper to buyout the guarentees and own the building than to make the lessor whole. Just some balance sheet musical chairs. Nothing to see here.
it makes their montly debts sheet that much smaller.. and their assets a little bigger if they got it under “value”. From a quick stock holders glimps the paper would look good.
Why, when Ford wanted to unload the Ren Cen GM stepped up and bought it is a great mystery.
With Detroit being “New Fallujah,” at least real estate is cheaper then other markets.
Like the comments above say, just some balance sheet accounting tricks.
paper values and stuff…
Or maybe they are even forced to put it on the balance sheet as an asset under USGAAP, with the residual value guarantees.
I’m not sure though, never liked accounting.
It’s an astounding decision. Not just because they just spent a lot of money on property in Detroit, but that they actually used cash to do it, instead of financing the transaction.
Also notice that they not only did this deal, but they also spent another $200 million on property in Pontiac. Cash purchase there, too.
Either there is something missing in the story, or else this is truly one of the most stupid things that I have ever read about a business decision. Absolutely unbelievably out-of-their-heads stupid.
I think that if Ch.11 is your goal, then this deal makes tons of sense. You’ll have less cash to distribute to lenders once in Ch.11 and you’ll effectively reduce your debt by much more than $626 million when those debts get written off. Plus, after your out of Ch.11 you will then be able to do a sale leaseback and improve your bottom line substantially without having to make any silly cars.
Anybody else looking forward to the toe tag sales this summer? It should be entertaining to see how cheap the ’08 and ’07 models will end up.
They’re saving $200mm a year in rent, so from that standpoint its actually a decent investment. Plus it will improve the income statement going forward ($200mm less in expenses) which the equity guys on Wall Street will like. Like everyone else, I question the cash going out at this time when they need it.
Sounds like this will save $–a good thing right now.
Maybe Rabid Rick and Bob Putz are getting 24k gold office redesigns for such a good job they are doing? Since those are attached to the building they’d stay as an improvement.
I think that if Ch.11 is your goal, then this deal makes tons of sense. You’ll have less cash to distribute to lenders once in Ch.11 and you’ll effectively reduce your debt by much more than $626 million when those debts get written off. Plus, after your out of Ch.11 you will then be able to do a sale leaseback and improve your bottom line substantially without having to make any silly cars.
If the purchase was financed, you’d have a point — GM could cram down the debt. But by paying cash and paying a high price for the property, a sale-leaseback after a BK filing would surely net them a loss, as they would end up selling the property at a steep discount.
They could have tied that money up with R&D. $826 million would have gone a long way toward getting a replacement for the Cobalt. If they want to play with the big boys, then they need to produce an alternative to the Civic and Corolla that doesn’t have Avis written all over it.
Pch101: a sale-leaseback after a BK filing would surely net them a loss, as they would end up selling the property at a steep discount.
Good point. But with Detroit real estate at a 25 year low, doesn’t locking in the current market price make sense? In a few years when the BK is over, you should still make money on the sale leaseback. Add to that the positive effect of reducing assets on your balance sheet and your stock options should finally be worth something.
Personally, I’ve given up hope that GM is ever going to invest in small cars and compete with the Civic.
But with Detroit real estate at a 25 year low, doesn’t locking in the current market price make sense?
I don’t think so, because Detroit’s problems go well beyond the current recession.
The city of Detroit is not going to recover when the rest of the country does. It is going to continue to skim along the bottom.
That, and I think that you will see real estate prices continue to fall, so GM is not buying at the bottom of the market. This thing is going to depreciate more quickly than a Suburban.
“Like the comments above say, just some balance sheet accounting tricks.”
It isn’t just accounting tricks when cold, hard cash is leaving the company.
I think next year, Detroit real estate will in a 26 year low. And in 2010, it will be in a 27 year low. And in 2011, it will be in a 28 year low. And in 2012…
# Pch101 :
May 9th, 2008 at 1:42 pm
This thing is going to depreciate more quickly than a Suburban.
As if such a thing was possible. LOL
If you consider all of GM’s moves to sell its non auto assets and rapid, cash burn, it looks like Rabid Rick and Fritz are setting up a Chapter 11 filing. “Look, Mr. Bankruptcy Judge, the piggy bank is empty and we have only core assets like office space and factories needed to sustain operations left…”
I would guess that if GM decided to continue leasing the RenCen it would be criticized negatively someway as well. It is so clear that the General can do no good here.
It is so clear that the General can do no good here.
It is. So why do they keep doing it?
(Oh, that isn’t what you meant, was it…)
“(Oh, that isn’t what you meant, was it…)”
I meant that I have observed a somewhat volatile attitude towards GM on this site.
they’ll probably end up not paying any taxes given that their expenses are so high.
I meant that I have observed a somewhat volatile attitude towards GM on this site.
I guess that gross mismanagement bothers some people. Go figure.
Do you think that it was a particularly good idea for a company in GM’s poor financial shape to buy an office building in one of the US’ worst cities that it could lease for a fraction of the cost?
This move pretty much violates a Business 101 rule about cash management — lease equipment unless you have a very good reason to buy it. The tax treatment is more favorable, and it frees up cash for more important things. Like developing a small car that people who aren’t fleet managers might actually want to buy, for example….
The news story notes “The Renaissance Center opened along the Detroit River in 1977. The $350 million project was spearheaded by Henry Ford II in an attempt to revive downtown Detroit following the 1967 riots.”
So, how’s that revival thing working out? Are people thronging downtown to shop? Population on the upswing? A booming demand for office space and housing?
A hemorrhaging company spends $626 million (after an initial half-billion in leasehold improvements) to keep its executive offices in a shining high-rise Versailles: living’ large in Detroit! It doesn’t get any better than this.
To begin with, GM didn’t buy the RenCen from Ford’s real estate company which long ago sold its interest. More to the point, if you read the article, GM borrowed money to move into the RenCen from it’s relatively antiquated HQ in the General Motors Building and instead of taking a mortgage, they leased the buildings from the lender. This isn’t some kind of prep for Ch. 11. The lease came due and they decided it was cheaper to buy the facility.
Putting aside market value, at today’s costs, it would take about $5 billion to build the RenCen, so $626 million isn’t a bad price in terms of the utilitarian value. In any case, what’s GM supposed to do? Move the HQ to Chicago like Boeing?
“Do you think that it was a particularly good idea for a company in GM’s poor financial shape to buy an office building in one of the US’ worst cities that it could lease for a fraction of the cost?”
Yes. And I would imagine they may have more insight as to their actual financial condition than the speculative naysayers here. So keep on killing GM, killing Detroit and whatever else makes you happy.
Putting aside market value, at today’s costs, it would take about $5 billion to build the RenCen, so $626 million isn’t a bad price in terms of the utilitarian value.
Unless the support beams are carved from gold and the windows were made from crushed diamonds from wedding rings, it wouldn’t cost $5 billion to rebuild the single building that GM purchased. The headquarters building is just a small component of the entire Ren Cen.
In any case, replacement cost is irrelevant to determining the value. And GM should have had better uses for the cash.
And I would imagine they may have more insight as to their actual financial condition than the speculative naysayers here.
That’s quite an imagination. Based upon the financial losses and ongoing decline of the company, this is looking like another brick in the wall of incompetence.
If GM was a highly successful company with a consistent track record of performance, they would get the benefit of the doubt. Sadly for the stockholders and employees, GM is anything but that. Hence, the raised eyebrows about a transaction that sucks huge amounts of cash out of a company that is running out of money.