Archive for February, 2011
|What’s in Your Wallet–and How to Keep It There, Part II
Friday, February 25th, 2011
By Phillip Infelise, Chairman & Managing Principal
In Part I, I began discussing the communication between Project Managers and clients surrounding the overall Project Budget, starting from a Conceptual Project Budget and moving toward a Preliminary Project Budget.
In this entry, I will continue the discussion.
Once focused on a specific site and true design documents evolve, we turn to a working Project Budget Revision that is a collaboration among all of the project team to meet the client’s needs within an established spend authorization. We have established line items that properly reflect expected spend, and then our challenge is keeping the team and the client always talking about solutions that fit into those line items. We establish a hard budget column, a current update column, and a final budget reconciliation column to track all costs in real time. We will issue a Project Budget Revision (maybe 12 to 20 over a typical project cycle) any time there is movement that suggests reallocating monies between line items. We do not stay in business if we need to increase the bottom-line spend; consequently, we are proud of our track record for not doing so. Most important, though, is our ability to counsel the client on where scarce dollars are best spent—a good example is whether to insulate walls or install sound-masking to get the best acoustic for the dollar spent.
Design and construction costs are not the money sink in projects, as they are the easiest to control for the Project Managers. (Stay tuned for a follow up blog entry on change orders.) Usually, we can establish accurate targets for these and work with our project partners to deliver the desired result within those parameters. The bigger challenges are the other numbers like:
-IT Costs. For some reason, few internal IT departments want to openly share their plans and the attendant costs. That’s problematic since an average project budget will need to include about $8 – $15/SF in overall IT costs, including structured vertical and horizontal cabling, IDF equipment, servers, new phones (now always VOIP), and more.
-Audio Visual. While they are useful communication tools, AV costs can quickly spiral out of control. Equally important are late AV additions that require infrastructure that should have been installed before walls were closed and the retrofitting that then impacts multiple trades.
-Wish Lists Unrevealed. Project Managers are very good at budgeting for what they know. No one is good at budgeting for what they don’t know. Even though our process requires that we ask the same cost questions multiple times, what is unsaid costs money. Typical budget costs not revealed until very late in the game include new AV applications, art work, special signage, graphics, special security, specialty lighting, plants, and special furniture, among others.
What surprises a client the most in a typical tenant build project? Usually, it is the overall cost—and the range of costs—for furniture. Many have heard that the build is in the $35 – $50/SF range. Few understand that all new furniture can add $25 to $35/SF. However, that being said, we also believe the biggest savings can be realized by accurate and leveraged furniture purchasing, blending old and new, understanding the relocation impacts and costs, looking at re-use products, and a wide variety of other options.
Yes, we talk our clients through our budgets. It is often not the easiest of conversations, but it is certainly one where we truly need to talk the talk and make sure our clients understand every word we are saying or not saying. The best chatter is at the end of the project when we talk about a result that exceeded expectations and returned savings to the bottom line!
Next time, I promise, let’s have a little fun and look at some acronyms and industry speak that baffle our clients—and some of our client speak that baffles us.
Then, much later, we will return to a sore subject—the curse of the change order.
Tags: budget, corporate real estate, cost savings, PM
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What’s in Your Wallet–and How to Keep It There, Part I
Wednesday, February 23rd, 2011
By Phillip Infelise, Chairman & Managing Principal
In my last blog entry, I promised we would have some fun with acronyms. But I thought there was a serious subject we had not yet touched on—Project Budgets—so we will save the frivolity for a while. Related to our last edition, we should consider the overall Project Budget as yet another form of communication between us and our clients. This form of communications is often the most difficult one since no one likes to talk about money. But Project Managers do like to talk about it—exactly how to get the project you want at the cost you can afford.
Typically, we want to begin the money conversation very early, often in a first meeting. Whether a TI build or a build-to-suit, we believe that—given the right initial information on size, character, aesthetic approach, what’s in, and what’s not in—we can provide the client with an appropriate Conceptual Project Budget during the first conversations. The conversation we don’t like to hear—either from our side of the table or theirs—is: “We can build the space out for the TI allowances provided.” Too often, the client hears that comment and thinks the total budget can be covered. Our job is to provide the bad news that such a scenario is rarely true when total project costs are included.
This first budget is generally a conversation about how much the basic items cost and where this particular client wants to spend or conserve its dollars. Generally speaking, we usually have about 50-60 line items divided into the following cost categories (NOTE: Only because I knew you would ask for it, I inserted some typical ranges you might expect on a basic tenant build project. There are caveats galore, too numerous to detail here. Please call me for details.):
-Design Costs ($2.50 – $5.00/SF)
-Construction Costs ($35.00 – $60.00/SF)
-Furniture Fixtures and Equipment ($15.00 – $40.00/SF)
-Voice, Data and Special Power ($6.00 – $15.00/SF)
-Administrative Costs/Contingencies ($5.00 – $15.00/SF)
-Total Cost, Minus Allowances and Offsets (less than $25.00 to $75.00/SF)
Our job is to describe the typical project and the estimated costs to the client and open a dialogue about what should be included or not included in this particular budget. We work on a wide enough range of projects to fully understand the potential costs in each line item and to describe what you get for a low, medium, or high spend in each. For a build-to-suit, land purchase and due diligence around it adds a major component, as does the core and shell construction, but otherwise, the majority of line items remain the same (even if the dollars associated with them are higher). And month-to-month cash flows are usually included in the build-to-suit budget to forecast the big spends for the finance team.
After a little more time with the client and further conversations about wants, needs, and funds devoted to the effort, we refine the budget to the next stage, a Preliminary Project Budget, ready to be tested against early space plans (aka test-fits) in a number of potential sites. This may also be the time to introduce a General Contractor and pre-construction estimates to the table. Accurate budgeting against multiple sites allows the real estate team and the client to thoroughly understand the true cost impacts of the specific site’s building systems and distribution, built environment (if any), allowances provided, and the actual net “cash-out-of-pocket” costs to the client at the end of the day.
In Part II, I will discuss the Project Budget Revision and the three areas that are often the most challenging for Project Managers to control costs. Stay tuned.
Tags: budget, build-to-suit, corporate real estate, cost savings, PM, TI allowance
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OPEX: The Hidden Costs, Part II
Friday, February 18th, 2011
By Jason Jones and Kathy Burke, Principals
In Part I, we gave an overview of operating expenses—what they are, what tenants should know about them, and when tenants should be concerned about an operating expense statement from their landlord. In Part II, we will continue the discussion.
The following issues are often predictive of errors and overcharges:
-Substantial capital improvements made within the past year. If improvements have been made to the building during the year, pay very close attention to make sure that the treatment of your operating expenses is recorded according to generally accepted accounting principles (GAAP). For instance, if a new roof is put on the building, or if the lobby was renovated, these types of expenses should be capitalized and, in the case of most leases, excluded from the operating costs charged to tenants.
-Transfer of the property to a new entity. New owners will often implement their own accounting practices and methodologies. In the event of a refinance or sale, it is not uncommon to experience significant clerical mistakes made because the new owner did not properly read your lease.
-Increased vacancy in the building. Vacancy frequently leads to errors and overcharges as a result of the landlord’s process of extrapolating the building’s expenses to reflect what they would have been at full occupancy (commonly referred to as a “gross up”).
What can tenants do to mitigate expenses?
Since you do not control the operation of the building, you need to rely on the professional expertise of the landlord. The items that a tenant can control are typically limited to your HVAC and electric consumption. Keeping thermostats at a reasonable temperature and turning off lights or, better yet, having light sensors installed can help.
Another way to mitigate your expenses is to have a well-negotiated lease document with the right to audit operating expenses. Without this right, you have limited recourse should expenses escalate rapidly.
Many companies perform annual audits as a matter of business practice. This practice alerts everyone that attention is being paid to this issue and increases the level of accuracy. Historically, 80 percent of reconciliation statements contain items that require further clarification, with 25 percent of those statements material enough to warrant an in-depth audit.
What should you ask for from your landlord?
The landlord should be able to provide documentation confirming what was budgeted as well as the actual expenses incurred. This documentation should include a detailed line-item statement with an explanation, by account, of the actual versus budgeted expenses.
It is not unreasonable for the tenant to request at least two prior years’ worth of history, if you have had the same landlord or property manager. This historical data will help you ascertain the validity of the charges, category by category.
Tags: corporate real estate, landlord, lease, opex, tenant
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OPEX: The Hidden Costs, Part I
Wednesday, February 16th, 2011
By Jason Jones and Kathy Burke, Principals
Much like a residential home, commercial office buildings experience normal operating expenses (OPEX) such as taxes, utilities, and ongoing maintenance charges. And, as is the case with a home, the occupant is billed for these expenses on a monthly basis.
Every year, landlords provide tenants with their annual operating expense reconciliation statements. This statement is basically a “true-up” of the actual costs incurred by the landlord versus the costs budgeted and already paid by the tenant. When you receive this document, it would be worthwhile to take a closer look to confirm whether or not the charges are appropriate.
In spite of everyone’s best efforts, there are often mistakes within these documents. Aside from mathematical errors, it’s important to realize most landlords issue their reconciliations based upon the “standard” lease, and your lease may deviate from that standard.
What should tenants know?
A well-negotiated lease document will clearly define allowable operating expenses, detail proper accounting treatment, and specify which costs are not allowed to be charged to the tenant. Typically, “operating costs” include your real estate taxes, cleaning, common area maintenance, building insurance, management fees, and repairs that had to be done during the year.
In practice, your landlord will estimate property expenses for the upcoming calendar year. Tenants pay their percentage share each month throughout the year, based on the budgeted amount. At the end of the year, the actual expenditures are calculated, and during the first quarter of the following year, the landlord will deliver an annual reconciliation statement. Over the course of the lease, these adjusted operating expenses can become a significant expense that should, at the very least, be reviewed and justified. Note that there is enough gray area in calculating operating expenses that entire businesses exist just for the purpose of auditing these costs for tenants.
When should tenants be concerned?
If the expense numbers appear excessive, you should ask your landlord for an explanation, subsequently following up with your real estate adviser to confirm whether or not they are consistent with the market.
Often, the best way to ensure accuracy is to request that your real estate advisor perform a “desk-top” audit. The first indicator of a billing error is an excessive percentage increase from your last year’s operating expense statement. Note that with the exception of taxes, insurance, utilities, repairs, and maintenance (based on the age of your building), it is customary for most categories of operating expenses to escalate less than 5 percent per year. Anything beyond this number requires further clarification. If you reach a double-digit number, an explanation is due.
Stay tuned for Part II, where we will discuss issues to look out for, what tenants can do to mitigate expenses, and what tenants should ask their landlord for.
Tags: corporate real estate, landlord, lease, opex, tenant
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What You Need to Consider about 3PL
Wednesday, February 9th, 2011
By Rob Wheeler, Vice President
For people outside the supply chain or logistics industry, the term “third party logistics” or “3PL” is probably vaguely familiar but not really understood. Understanding what 3PL companies do and how they do it may provide some insight into different real estate decisions these firms make.
Third Party Logistics companies started back in the ‘70s and ‘80s, when companies began outsourcing what they deemed non-core competencies of their business. This meant that unless they were in the business of moving goods, managing the corresponding transportation and warehousing function was increasingly seen as a non-core competency.
As the third party logistics industry has grown and evolved, various companies have concentrated on different aspects of the logistics industry. Some 3PLs focus on warehousing, some on transportation management, and others on moving freight. However, all of these companies look to integrate into an organization’s infrastructure, not necessarily supplant it.
Why does a real estate director bring up 3PLs? The access point for most companies to enter the 3PL world is the warehousing component. They need additional space and don’t want to take on the lease or employees themselves, so they look outside their organization. In the near term, it makes sense, is more convenient, and provides more flexibility to the organization. But is it the best decision? Here are some things to consider.
-A contract with a 3PL is typically of much shorter duration than an industrial lease. It could be a two- to three-year operational agreement as opposed to a five-, seven-, or even 10-year warehouse lease. 3PLs typically don’t allow that warehouse space to be vacant. They instead work with landlords to lease space that corresponds to the operating agreement, signing a two- to three-year lease as well. Because the financial commitment of a longer lease provides greater return to a landlord, the net effective rent of the shorter-term lease will be higher.
-Rents landlords offer to potential tenants vary greatly based on the credit-worthiness of the tenant. In many cases, the company contracting with the 3PL will have better credit than the 3PL itself and thus could be offered better deal terms than the 3PL would. The 3PL will most likely pass through this higher rental rate and include a markup.
-What if you are unhappy with the service that the 3PL is providing and you terminate a contract with the 3PL? In many cases, the 3PL has the right to assign the lease back to its customer. This means the customer will be stuck with the higher rental rate lease that the 3PL negotiated.
-What if something goes wrong or plans change? Having control of the warehouse space can be very important. Consider that should plans change, what’s the incentive of the 3PL to sublease the space? Can you get to your goods if the 3PL goes bankrupt?
At CresaPartners, we can help your organization walk through the 3PL contracting process by advising on all real estate matters. It may be worth the extra dollars to have 3PLs lease the warehouse themselves and bury that cost into the operating contract. It could be a better decision to separate the operations and real estate function to have more direct control over the process. Our team of Industrial/Supply Chain experts can provide you with the information needed to make the right decision for your company.
Tags: 3PL, corporate real estate, industrial, third party logistics
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Facilities Management and Energy Conservation
Wednesday, February 2nd, 2011
By Jim Ricker, Vice President, Corporate Services
For the past few years, we have all read vast amounts of literature about the need to conserve energy. During this time, energy conservation became known as “going green” or “sustainability.” Regardless of the names and definitions, they all are geared toward the same end—improved utilization of our finite resources to the point that we rely only upon renewable energy sources and reduce or even eliminate the waste stream.
While the terminology may change, professional Facilities Managers have long been striving to reach the goals of sustainability. These initiatives originated from the budget process – reducing operating expenses in order to free-up capital for research & development, marketing, and sales. During the Carter administration and the OPEC-generated oil crisis in the mid-‘70s, Facilities Managers responded to the national mandate to reduce energy consumption and the dependence upon foreign oil. Many readers will remember the gas lines, thermostats set in the low 60s, the emergence of the solar energy industry, and a national speed limit of 55 miles per hours.
As OPEC loosened its grip in the late ‘70s and oil started to flow again, these conservation initiatives were set aside by the Reagan administration. However, the majority of Facilities Managers continued their energy-savings efforts – even when the nation returned to 75 miles per hour on its highways. Budgets had to be tightly managed since the calls for capital did not change. So the enterprising Facilities Managers and their suppliers continued to innovate as before:
-Lighting energy usage continued to drop as electronic ballasts and more efficient lamps emerged. Foot candle measurements came into vogue as a means of determining the proper amount of lighting required for the tasks performed at the desktop.
-Paper products in the restroom migrated from all new content to primarily recycled content.
-Cleaning supplies went from chemicals that polluted our water supply to those that are essentially harmless to the environment.
-Motors were switched to more efficient models using substantially less electricity.
-HVAC systems were changed to heat pumps and central systems using highly efficient chillers circulating chilled water to remote units.
-Low-flow and battery-operated fixtures were installed in restrooms.
-Control systems were replaced with those that more efficiently matched up-time with usage requirements.
Today, Facilities Managers are in the lead in pushing for more innovations for solar systems, wind systems, and even tidal power in certain localities. They recognize it is the only way to further reduce energy costs and also the way to eliminate dependence on finite resources by utilizing renewable alternatives.
Tags: corporate real estate, FM, green, OPEC, renewable energy, sustainable
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