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Today, it is more expensive to run a company. People, energy and technology, which change with regularity, are more expensive, and unforeseen competition can undermine sales at any moment. During the past few years, the seemingly limitless stores of capital market resources all but vaporized, only recently have these capital sources re-emerged. In the meantime, while corporate earnings pressures continue to mount, the collective brain trust of both the IASB and FASB are radically changing rules on such topics and activities as lease accounting, revenue recognition and asset mark-to-market recognition.
Whether your firm is a publicly traded company or privately held, it continues to be under tremendous pressure to perform. Companies are required to achieve immediate and sustained earnings, in a tough, fiercely competitive and often uncertain environment, where change occurs with unsettling regularity. Companies committed not just to survive, but to prosper in a reduced-resource environment, will be characterized by the quality and timeliness of the many decisions they will be required to make. One such critical decision is assuring that corporate capital is positioned efficiently to provide the highest yield for core business activities, while minimizing its impact on the balance sheet and continuing to support operational demands.
Don’t Become a Hostage
We all recognize the almost predictable cyclical nature of our world economy. And, in times of unbridled prosperity or economic turmoil, we tend to ignore the signals of impending correction and often leave the underlying value of our corporate real estate subject to significant market risk. Often times, a major use of capital are the corporate real estate holdings of a company. Surprisingly, these assets are often not properly structured to reflect the operational requirements and financial needs of the organization. In essence, the company becomes hostage to its real estate decisions. Evidence of this is plentiful:
- decisions related to leasing, ownership or other hybrid structures are often not seriously considered;
- design decisions are made without consideration for an exit strategy;
- vast amounts of profits are left in the hands of developers that could be used to reduce occupancy costs;
- corporate facilities management responsibilities are administered in-house, when significant savings and efficiency may be achieved via outsourcing initiatives; and
- capital is often kept stranded in owned assets, when it is better suited for higher-yield core operations.
To truly fulfill a company’s overall operational and financial objectives, the structure and financing of corporate real estate holdings should support and reflect core business fundamentals. Regardless of a company’s size or age, and even if corporate real estate plays a minor role in your company’s capital structure, properly planned, structured and executed real estate finance alternatives will maximize efficiency, allow control of assets in such a manner to fulfill core business strategies, and minimize its overall costs of occupancy. As depicted on the right, when a company is able to obtain an alignment between the needs of the COO and the CFO, within the context of the local and capital markets, the result can be a successful, coordinated strategic real estate plan.
Competing Interests
Corporate real estate holdings should be structured to balance the often competing demands of the COO for operational control and flexibility, versus the CFO’s requirements for maximizing return and minimizing total facility operating costs. To help achieve the appropriate balance of demands, executives must be equipped with tools and protocols for the fundamental asset management of a corporate real estate portfolio. In other words, before embarking on a specific real estate strategic implementation, corporate executives should perform a critical review of all real estate financing alternatives within context of the inherent corporate environment. This critical review is essential whether your company may:
- seek to restructure assets to enhance performance measurements and obtain cash for core business opportunities;
- possess immediate real estate needs that demand financing alternatives with minimal effect on earnings, cash flow and the balance sheet; or
- boast record levels of unrestricted cash and is examining unique opportunities to enhance management effectiveness ratios and control of critical corporate assets.
In any case, a regular and recurring critical assessment of your corporate real estate financing strategy will ensure that your company is positioned to support core business requirements and take advantage of current opportunities in the capital and real estate markets.
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This is an excellent article and speaks to exactly the kind of insights and working strategies we are bringing to our clients globally.
Good Stuff!