In what one real estate observer called a “classic leverage play,” United Airlines announced in May that it might relocate its headquarters out of the Chicago area to its hub cities of Denver or San Francisco.
Then, like other major employers in this age of corporate consolidation, it waited for the incentives to roll in. And they apparently did, because Mayor Richard Daley’s office said Friday that there will be a news conference Saturday to announce a deal in which the carrier will move to 77 W. Wacker Drive.
United would pay top dollar, about $16 million a year for 10 or 15 years, to rent approximately 165,000 square feet in one of the top office towers in the city. To offset some of that expense, the carrier is likely to receive a multimillion-dollar incentive package from the city and state.
As is customary in the city’s weak leasing market, the landlord, Prime Group Realty Trust, probably will pay the brokerage fees and perhaps about two-thirds of the $100 a square foot required to fit out United’s interior office space. That could add up to about $12 million.
Prime declined to comment on the deal, but real estate professionals estimated it is likely also to kick in a year or so of free rent.
All this largess might be well worth it for the city, state and landlord.
“It’s a huge deal,” said Shawn Mobley, executive vice president at real estate firm Grubb & Ellis Co. “The last major corporate relocation downtown was when Boeing left Seattle almost five years ago.
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“Not to suggest a ruse in any way, but it’s a classic leverage play,” said Mobley, who has represented several firms in relocating. He engineered his own firm’s move downtown from suburban Northbrook this year to be closer to its clients.
“You go through the motions of looking out of state,” Mobley explained. “The package you get correlates to public officials’ belief that the company has a better alternative location.”
But in getting a good incentive package, he said, “you walk a fine line.” There’s a risk of losing workers worried they’ll be out of a job, or of the firm being seen as “a heavy-handed corporate citizen,” Mobley said.
Tough negotiations are needed in today’s tough economy, said Peter Livaditis, an executive vice president for the Dallas-based real estate firm Trammell Crow Co.
“Corporations need to find every cost advantage they can, including the cost of real estate, labor, technology and government incentives,” he said.
“Any city would aggressively compete to secure a company with a household name like United,” Livaditis added. “It’s a headquarters–jobs and prestige.”
The cautionary note, however, is that the public sector not give up more than necessary, said Laurence Msall, president of the Civic Federation, an independent tax-policy research organization.
“It’s the `but for’ factor,” Msall said. “The challenge for government is to effectively evaluate `but for’ these incentives the company wouldn’t relocate here.”
Furthermore, said John Paul Jones of the Neighborhood Capital Budget Group, a coalition of community groups that works to increase public investment in infrastructure, United has to live up to its promises of jobs and other benefits.
“We don’t want to see them renege on their commitments to Chicago,” Jones said.
The last corporate relocation to cause such excitement here was when Boeing moved from Seattle in 2001. Back then, Chicago, Denver and Dallas competed for the prize with giant parties amid helicopter-propelled site tours.
The aerospace giant won an incentive of about $30 million from the state and $21 million from the city to move about 400 employees into 100 N. Riverside Plaza.
In contrast, United hired a search firm to find space for about 350 employees and tried to stay out of the spotlight. While much media attention focused on the possible loss of United to another city, it appears that most of the airline’s search focused on Chicago.
At the invitation of officials in California, Jake Brace, United’s chief financial officer, visited San Francisco.
“It was a quick in and out,” said Dennis Conaghan, executive director of the San Francisco Center for Economic Development. “We thought it was a window-shopping-type trip.”
The carrier never made any on-site visits to properties in the Denver area, said Tom Clark, executive vice president of the Metro Denver Economic Development Corp.
United’s pursuit of a new headquarters location has been “absolutely the most manipulative deal I’ve ever seen” in terms of media coverage, Clark said.
His ire was directed at the media, not the airline, for making United’s departure from Illinois seem more likely than it ever was. He said United never led Denver to think it was a more serious candidate than it was.
Amid the euphoria of landing a trophy tenant, Prime Group doubtless considered that the airline emerged from a three-year bankruptcy this year.
“United will need to post a significant letter of credit as collateral,” said Mobley, of Grubb & Ellis.
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