Oncor Electric Delivery

Client Situation

In 2007 Studley (now Savills Studley) had completed a relocation for TXU Energy Retail’s headquarters achieving significant results that caught the attention of sister company, Oncor Electric Delivery. Oncor’s footprint in its downtown Fort Worth headquarters greatly exceeded its headcount demand. At the time, KKR and TPG had recently completed the acquisition of TXU Energy (now Energy Future Holdings) which was the single largest private equity transaction in history (the Oncor utility was part of said transaction). The company was seeking cost reduction opportunities and wished to evaluate various scenarios that allowed for same including building a smaller footprint on owned land across from the current location, moving to alternative 2nd generation buildings and restructuring the lease early which was due to expire in 4 years.

Consideration Analysis

Oncor’s current-state requirements and the availability of buildings in the Fort Worth CBD to meet Oncor’s demand were fully analyzed. Various alternatives including a lease restructure and renewal, relocation opportunities and sale leasebacks utilizing Energy Future Holdings owned land were examined. After determining that restructuring and renewing the current lease was the most financially viable alternative, the Landlord’s initial proposal was analyzed and re-engineered to extract value for Oncor. Studley was able to re-engineer the proposal and accomplish these objectives based on the following facts:

  • Oncor’s 7% financing rate vs. Landlord’s 10% financing rate
  • Landlord’s need for funds in the term of capital instead of rent
  • Landlord’s need to refinance or sell the property in 2012

Additionally, to determine how best to respond, a Landlord discounted cash flow (“DCF”) was performed to determine the Landlord’s point of indifference. Utilizing the re-engineered proposal and the DCF point of indifference analysis, Studley negotiated a new lease structure that would otherwise not be achievable compared to “market terms”.

Result

Oncor was forgiven material amounts of rent through its previous expiration date in 2012 by Landlord early terminating of over 53,000 rentable square feet of space. In addition, Studley was able to take advantage of Oncor’s preference to use its own capital to fund improvements and negotiate a rental rate that amortized out Landlord’s previously proposed allowances at their higher cost of capital. In addition, Studley drove the economic terms near the Landlord’s indifference point with the real threat posed by Oncor management of relocating to owned space in Dallas at the Energy Future Holdings headquarters.

Summary Information

  • Property: 115 West 7th Street, Fort Worth, TX,
  • Transaction Size: 200,000 RSF
  • Transaction Type: Headquarter Renewal
  • Service Line: Office