By John Horner
May 9, 2008 -
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.
Subscribe to Newsletter28 Responses to “ Why Build Better Cars When You Can Invest in Detroit Real Estate? ”
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May 9th, 2008 at 10:18 am
Ring-fencing.
I wouldn’t like to be in a position where GM owed me money.
May 9th, 2008 at 10:25 am
$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.
May 9th, 2008 at 10:38 am
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.
May 9th, 2008 at 11:23 am
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.
May 9th, 2008 at 11:29 am
Why, when Ford wanted to unload the Ren Cen GM stepped up and bought it is a great mystery.
May 9th, 2008 at 11:58 am
With Detroit being “New Fallujah,” at least real estate is cheaper then other markets.
May 9th, 2008 at 12:06 pm
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.
May 9th, 2008 at 12:08 pm
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.
May 9th, 2008 at 12:20 pm
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.
May 9th, 2008 at 12:40 pm
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.