Sun properties come into play

The Baltimore Sun

At about the same time Tribune Co. plans to take on billions of dollars in debt to go private under a transaction announced earlier this week, the company will have a chance to buy eight former Times Mirror Co. properties - including The Baltimore Sun Co.'s downtown headquarters and nearly 60-acre printing facility - for the below-market price of $175 million.

That price will be available only in January 2008, at a time when some analysts said the company's heavy debt load from the deal with Chicago real estate mogul Samuel Zell to go private may make it difficult to finance the purchase.

If the borrowing required to take the company private does preclude the purchase, Tribune would have to pay at least $20 million more if it seeks to buy the 3-million- square-foot real estate portfolio at a later date.

The $175 million figure comes from a September 2006 deal intended to disentangle the company from the Chandler Trusts, its largest stakeholders, with whom it had been sparring publicly about Tribune management's policies. Tribune pays the partnerships more than $24 million a year to lease the properties. The total portfolio has been appraised at $325 million, according to an article in the Los Angeles Times.

But Tribune's projected debt load of $11 billion from going private gives analysts pause. "Financially, this would become more problematic for Tribune because of the debt they already have," said David Novosel, an analyst at Gimme Credit Publications Inc. in Chicago. "If they're looking for financing for even more debt, they could meet some resistance there."

The partnerships are an artifact of Tribune's 2000 purchase of Times Mirror, the Chandler-controlled company that published The Sun, Newsday, Los Angeles Times, Hartford Courant and other newspapers.

One of the partnerships owns The Sun' s headquarters, in the 500 and 600 blocks of N. Calvert St.; the parking garage and office space immediately north; and the Sun Park printing facility on Cromwell Street in Port Covington, a South Baltimore industrial area cradled between the Patapsco River, Hanover Street and Interstate 95.

Together, the properties are assessed at roughly $66 million. According to state property assessment records, the headquarters building is 450,000 square feet - as large as 2 1/2 Wal-Mart supercenters - and the Port Covington property spans nearly 60 acres.

Local real estate experts said the Baltimore sites would likely draw significant interest from investors looking for cash flow - the buildings could be sold and then leased back to The Sun - or redevelopment opportunities if Tribune chose to acquire and then resell them. The Calvert Street and South Baltimore properties are near projects to convert old office and industrial space into residential and mixed-use complexes.

Discussions about real estate sales are familiar territory for the newspaper. Sun officials talked about moving more than the printing operations to Sun Park, which opened in 1992.

"The original concept was to have the entire operation down at Sun Park," said Mary E. Junck, who was publisher of The Sun from 1993 to 1997 and is now president and chief executive of the Lee Enterprises Inc. newspaper chain. "The lobby is much grander than you typically have in a production building."

During her tenure, a real estate affiliate of the Johns Hopkins Institutions negotiated to buy the two Calvert Street properties for $10 million and lease them back to the newspaper. The affiliate planned to renovate the aging buildings and put in ground-level retail. But the sale was delayed by complications and was finally scrapped in 1997 - a year later - after Times Mirror and the Chandlers formed their partnership.

Joseph M. Cronyn, a partner with real estate consultants Lipman Frizzell & Mitchell, said both the downtown and Port Covington parcels have redevelopment potential and could be converted into a mix of retail, residences and offices, with or without The Sun as a tenant. (The newspaper leases the offices connected to the garage to an architectural firm and does not use all its headquarters space.)

Both sections of the city have been sought after by developers. That's particularly true of downtown, where they're turning old offices into condos and apartments, Cronyn said.

"Developing as large a tract as that in that location would sort of fill in that ... northeast quadrant of downtown there, and I think that could really work extremely well," he said.

If Tribune does not buy the Chandler Trust properties in January 2008, it could either purchase the portfolio for a minimum of $195 million during a subsequent window or extend its lease for 12 years at current rents. There also is an option for an additional 12-year extension, though rents could be substantially higher.

In the short term, analyst Novosel said, the company might be better off continuing to lease the space "to minimize the cash outflows." But he said that because the price has a clear sunset, that approach might not be in the company's long-term interest.

Newspaper analyst Mike Simonton, of Fitch Ratings Inc. in Chicago, said the company will have to reckon with tough decisions about how to spend its "limited discretionary cash flow," especially given a stated imperative to invest in digital resources. "So they'll have to determine whether or not the real estate is the best use of their capital at that time."

Still, Simonton said, the below-market purchase of real property might be a safer use of funds than reinvestment in Tribune's core publishing business.

Newsday reporter Daniel Wagner contributed to this article.

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