Archive for November, 2010
|FASB Fears = Opportunity to Shine
Wednesday, November 24th, 2010
By Jeff Tosello
With all of the hype surrounding the now not-so-newly proposed changes to the way the Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) will require companies to report lease costs, it’s going to take expensive, highly developed software and a team of Harvard mathematicians working for weeks on a complicated set of algorithms to figure it all out, right? Wrong!
Here’s the good news: much of the information that will be needed to perform the compliance calculations are already essential components of good solid lease administration now. The trouble is that many companies cannot or do not properly execute lease administration, so they don’t have this crucial information. Companies often fail in one or more of the following areas:
- No firm grasp on their complete lease portfolio (international or domestic)
- No confidence that all of their documents are signed, accessible, and up to date
- No reliable extraction of lease information (abstracts)
- No up-to-date database of lease information (working from an outdated
spreadsheet)
- No idea what market rent is or will be when renewal needs to be considered
- No idea about business units’ plans relative to available options
Getting these items under control now is critical in order to anticipate the proper numbers on the company’s balance sheet later. Having a documented business process for knowing where these numbers come from, what considerations are given for changing them, and how to track changes from reporting period to reporting period is the key. These are services that can be immediately available through Lease Administration professionals.
If your company is concerned about FASB/IFRS changes in lease accounting but aren’t sure what to do to even start considering how you’ll comply, consider the list above. If you feel confident in these areas and want some help considering the impact to their financial statements, schedule a consultation with Capital Markets experts. If you do not feel confident in these areas, consult with Lease Administration professionals to discuss getting these things in place today.
Tags: corporate real estate, FASB, lease accounting, lease portfolio
Posted in Lease Administration | 1 Comment »
Forewarned is Forearmed: Read Your Lease
Wednesday, November 17th, 2010
By Darren Fleming
It may seem like simple advice, but reading their lease is something that a disturbing amount of tenants just do not take the time to do prior to signing, or resigning, their office lease. In fact many of our clients are not the same person who handled the last transaction on behalf of their organization. As a result, they do not possess any of the historical context that was at play five or ten years ago when the current contract was signed.
That’s why it is so important that before any action is taken that you read the lease – thoroughly. This means cover-to-cover, all the schedules, and any amendments that might have been made. Take notes and call an expert you trust if you have questions. There are potentially many hidden costs in a commercial lease and several of them come into play only at the end of the contract. So before you decide to talk to your landlord you had better be up to speed on your rights and obligations in order to avoid any nasty surprises. In this entry I will discuss two of the more common lease clauses I have seen that can cause problems and offer some tips and strategies to deal with them.
Protect your option to renew
The majority of tenants do not understand the purpose of an option to renew, or why it is a must-have in any lease. These clauses, which usually carry a requirement to give the landlord six or nine months’ advance written notice if they are to be exercised, are not just there to provide a reminder to talk to the landlord. Their sole purpose is to prevent a landlord from leasing your space out from under you in the event a more attractive tenant comes their way.
You may have spent major dollars retrofitting your 5,000 SF office when you moved in five years ago, only to have the property’s anchor tenant negotiate to take your beautiful space should you forget to exercise your option to renew. That is why it is essential to be aware of your notice obligations at all times. If you miss your notice window you have likely lost the option forever.
Restoration/reinstatement obligations
Unbeknownst to most tenants is that at the end of the lease term most standard commercial leases require a departing tenant to return a space back to its base building condition. This usually means bare concrete floors and the demolition of all interior walls. In most cases the landlord also has the right to insist on doing the work on the departing tenant’s behalf and all at the tenant’s expense. What’s worse is that many leases state that even if you were not the one who did the construction in the first place, you can still be on the hook for the removal. This particularly nasty surprise can be hard to spot and if you suspect you might have this type of clause in your lease, call an expert for advice on how to handle it.
Many uninformed tenants have had their negotiating leverage eliminated in one stroke when informed by their existing landlord that they would be charged thousands of dollars should they fail to renew their lease and leave. In some cases a tenant may then find themselves in the position of being unable to move and they typically renew at a higher rental rate than they might otherwise have been able to negotiate. The best defense is of course to strike this clause from the document before you sign but since time travel isn’t an option, when faced with a potential restoration obligation, you will likely have to get creative to avoid writing a big check.
It is vital to ensure you are aware of any potential pitfalls in your lease that could affect your company at the end of the term. Failure to do your homework and take preventative steps will undoubtedly cost you money. Forewarned is forearmed.
Tags: corporate real estate, landlord, lease
Posted in Transaction Management | Comments Off
Industrial Location Planning
Wednesday, November 10th, 2010
By Tim Myllykangas and Mitch Jacoby
So you have a client that needs space in an industrial building. Just a basic real estate project, right? Run a market survey, get some market deal comps, and start touring. You may want to reconsider that approach and beef up your offerings by researching and analyzing the typical location drivers for manufacturing, distribution, and warehouse projects.
The top drivers in determining an optimal industrial location are as follows:
-Logistics: Freight costs and delivery times for both raw materials and finished product
-Power Rates: Rates vary by state, county, municipality, utility district, industrial park, and incentive zone
-Power Reliability: Using industry indices such as CAIDI (Customer Average Interruption Duration Index), SAIDI (System Average Interruption Duration Index), and SAIFI (System Average Interruption Frequency Index)
-Natural Disaster Risk: Probability of occurrence for the eight major Declared Disaster categories
-Workforce: Identifying optimal labor pools, performing a sector saturation comparison, and looking at wage levels
-Labor Unions: Historical and current organization attempts, activity by sector and by company, and effect on wage levels
Consider this: a plastics product company was seeking to identify a new, optimal location for a 500,000 SF, 250-employee manufacturing and distribution facility in North America. Given that this would be a new location, the company required options in multiple states and communities, ultimately considering a long list of over 40 communities in 12 states with 18 logistics hubs. From this long list, four finalist logistics hubs were considered optimal in terms of freight costs, delivery times, power rates, reliability, and workforce.
Through research and comprehensive analysis, the company identified 10-year savings opportunities as noted below:
Labor: $4,000,000 or $16,000/job
Power: $12,000,000 or $48,000/job
Freight: $45,000,000 or $180,000/job
Total: $61,000,000 or $244,000/job
Surprisingly, freight cost savings were not only significant but dwarfed both labor and power cost savings. And no matter how much was saved on real estate, it would not likely come close to the freight savings. In addition, delivery times were reduced by 32%, and labor pools with high under-employment were identified.
The take away? By analyzing and researching the key location drivers for industrial projects in numerous geographic regions, substantial savings can be realized for your client. Regardless of economic conditions, a proven process of finding optimal locations for your client will deliver meaningful savings, making you look smart and on the leading edge of corporate services.
Tags: corporate real estate, industrial, manufacturing, Site Selection
Posted in Workforce & Location Planning | Comments Off
Navigating the Transaction Process – Part I
Wednesday, November 3rd, 2010
By Liz Roberts
Transaction Management Process is a term that is frequently tossed around the commercial real estate industry. Most every Corporate Real Estate Executive has at least one, if not many, process flow charts sitting in binders on their bookshelves. Personally, flow charts give me headaches, but they fill an important role in demonstrating process and developing best practices for every type of real estate user.
The transaction process can be broken up into six buckets:
-Define Requirements
-Decision Support
-Analysis/Negotiation
-Design Development
-Construction
-Move-in
Let’s start at the beginning – Define Requirements. In a perfect world, the real estate requirement is defined via a clear and articulate strategy that was developed months, or even years, prior to an action taking place. But this is not always the case, so before launching into a real estate goose chase, ask yourself the following questions:
-What is driving this decision? Is it a business action—like employee growth—or a real estate action—like an upcoming lease expiration?
-If it is a business action, how does this affect the real estate? Does it create a need for more space? Will you need flexibility? What are the key factors, and what is the business horizon that you are examining? Three years? Five years?
-If it is a real estate action, how does this lease currently complement the business drivers?
-Where does the lease fit into the bigger picture? What are your overall real estate goals?
Once you’ve developed answers to some, if not all, of the above questions, the next step is to determine preliminary criteria. There are four items that every group should address:
Financial Criteria
-What is the current financial situation? How much do you pay each month? Don’t just focus on rent but on your true “pay rate”, i.e. what is the amount of the check that is written on the first of the month?
-How does your current rental rate compare with the real estate market? Are you above or below where transactions are closing today?
-What is your financial wherewithal? Can you afford more? Do you need to cut costs?
Location Criteria
-Does your current location work for you? Are you near amenities, major highways, or public transportation?
-How are employee commute times? Are you close to your customers? Do you need to be?
-If you relocated, how would that affect the employees?
-Does your location impact your tax burden? Would changing municipalities help or hurt you?
Operational Criteria
-Does your current space complement your business needs?
-Is it too much or too little? Does the configuration of offices, workstations, and common areas create the right kind of environment?
-Are you in a “conventional” office? Would considering Alternative Workplace Strategies make sense for your organization?
Image/Quality Criteria
-Does your office space properly reflect your business and/or brand?
-How does the space and building look? Is it new? Old and tired?
By examining each of the listed criteria, one can create a strong roadmap for identifying and securing the ideal office. Your commercial real estate advisor can help you to answer all of these questions, and then work with you to develop the appropriate deliverables. These deliverables include a space program which details how many offices, workstations, conference rooms, etc. that are needed. This also includes a preliminary market survey that will include the options in the market that fit your preliminary criteria. Lastly, these criteria help to develop a preliminary budget of relocation costs, as well as an expected timeline of events.
Now you have a clearly defined requirement and the associated tools to begin your Transaction Management Process. I will discuss the subsequent step—Decision Support—in my next entry.
Tags: corporate real estate, process, real estate requirement, TM
Posted in Transaction Management | Comments Off
