Why Build Better Cars When You Can Invest in Detroit Real Estate?

by John Horner

Published: May 9th, 2008

why build better cars when you can invest in detroit real estate

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.

John Horner

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4 of 28 comments

50merc on May 11, 2008

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.

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Bozoer Rebbe on May 12, 2008

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?

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Skooter on May 12, 2008

"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.

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Pch101 on May 12, 2008
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.

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