Is Less Actually More?

Less is More? I frequently have people ask me, "Why the name "Less is More" and what does it represent?"  

Less is More is one of the basic concepts that we teach corporations to embrace regarding their operational real estate. The ability to minimize facility obligations and cost in relation to your competition creates a key competitive advantage for your firm.

In service businesses, this means reducing the real estate cost/employee or cost/seat. For distribution, it is cost/pallet position or cost/pallet occupancy term. In manufacturing, it is cost/widget produced or cost/revenue dollar. These metrics are Key Performance Indicators (KPI) and you’ll typically track more than one to get an accurate measure of success.

Click to read more ...

The Eight P&L Impacts of a Corporate Lease

On many CFO and financial executive’s Urgent Issues or Focus List, real estate often doesn’t make the top ten.  Why?  I think in part it is because the impact of a real estate decision is spread over many categories of the Profit & Loss Statement.  In addition, often financial analysis of a lease decision is based on the rent and operating expense being paid now vs. the rent and operating expense on the new lease.  If the impact is acceptable, the company moves forward.  Simple enough, right?  Perhaps too simple.

Click to read more ...

Up in Flames. What happens if your commercial space burns to the ground?

In the last 25+ years, our tenant representation clients have experienced fire and smoke damage to their facilities, and we've heard stories from people who's buildings have burned to the ground, although just recently experienced first hand a total destruction.  Not just a fire, but a complete nothing-but-cinders-remain inferno that devastated the building including one of our client's delivery vehicles.

The facility was a distribution warehouse in a multi-tenant building and industrial park.

So that brings up something to perhaps consider with a bit more concern in future lease documents:  The Destruction Clause.

Click to read more ...

Going Green

Many corporate tenants mistakenly believe that incorporating sustainability into their buildings is the landlord's responsibility.  In fact, the tenant controls a significant amount of options to improve the LEED rating of their space through interior space design and specifications.

Most just don't bother, often because the tenant finish is completed by the landlord on a turn-key basis.  When was the last time that your specifications stated that the installed lighting would provide the most favorable ROI based on both initial cost AND operating costs over the term of the lease?

I'll answer that for you:  Never.

So, why?

Click to read more ...

Commercial Lease Commencement Dates

A typical commercial office or industrial lease states something to the effect that the “The Commencement Date of the Lease shall be the later of X date or the date that the Landlord delivers the Premises to the Tenant.”  (Note:  If it says the “earlier of X date ….”, your landlord is really giving you a raw deal.)

This Commencement Date language protects you in case the Landlord is late in completing construction and you don’t get possession when planned.  Right?  Wrong.  Here’s why:

Click to read more ...

The Operating Expense Trap

Imagine that you purchased $10,000 worth of product from one of your suppliers.  When the invoice came, however, they incorrectly billed you $20,000 and your accounts payable department unknowing paid the full invoice.  When you discovered the error 45 days later, you approached the vendor and they said, “Sorry, read the fine print.  If you don't object to the billing within 30 days, we get to keep your money.”

Would you ever do business on these terms?  Would you ever accept such an attitude from your vendor?

Guess what?  You're doing it now, and the vendor is your landlord.

Click to read more ...

It Pays to Explore Sub-Markets (and Beyond)

From a national perspective, you may look at a list of rental rates, peg where your current or prospective lease falls and, if within a range of 5-10% or so, figure you are doing well.  Are you?  Maybe, maybe not.  Here's why:  Typically, market rents are quoted as average rates.  Forget that they ignore your particular improvements and other critical requirements.  There can be big – really large – huge swings in price from one sub-market to another.

Click to read more ...

Commercial Real Estate Leasing Market Update

CoStar is, for anyone not familiar with them, a service that tracks building occupancy in a very detailed way for office and industrial buildings.  They recently released their 2010 Year End Summary.  The verdict?  Occupancy is up, barely, and rates are either declining at a slow(er) rate or nudging up in some markets.

One interesting aspect is the disparity in rental rates from market to market.  For example, average industrial rates range from less than $3 in some markets to over $10 in others.  I'll talk more about that in my next post.

On a micro level, we've seen landlord asking rates and proposals all over the board even within a single market.  In Houston, for example, we received offers on Class A industrial distribution space with similar attributes (office, clear height, dock doors, access) range from about $4/SQFT to over $9/SQFT.  All of these properties were virtually commodity spaces, located within a 5 mile radius.

What this is demonstrating is the inefficiency of the real estate market.

Click to read more ...

How Smart Companies Manage Multiple Locations

Any corporation with more than one office/branch/site is large enough to have real estate portfolio objectives.  With just a handful of locations, the C-level executives are likely very hands-on in determining the best solution as real estate opportunities or decisions present themselves.  Once the number of sites grows to a point where that oversight is delegated though - whether placed under the responsibility of another staff member such as Regional VP's, Controller, VP of Finance, General Counsel, or a dedicated Director of Real Estate - there are three styles that the management can typically be classified under:

Click to read more ...

The #1 Renewal Negotiation Mistake Made by Tenants

I never cease to be amazed to see otherwise astute business people who are confident that they can outwit a professional landlord. 

I once read that it is estimated that John McEnroe has hit a tennis ball over the net more than 13 million times.  I don't care how much you practice or warm up, he is likely going to make you look foolish on the court if you were to play him.  Landlords who negotiate hundreds or even thousands of leases each year often do the same thing with tenants that only negotiate a lease once every three or five years.

And what is the biggest "gotcha" that they usually stick it to the tenant on at renewal time?

Click to read more ...

5 Ways to Protect Against Defaulting Commercial Landlords

A few weeks ago, one of my clients had an issue where a landlord gave them a proposal to lease space and the client accepted the proposal.  The proposal was at an aggressive market rate with a significant, although not exceedingly unusual, improvement allowance.  The landlord group is a large institutional investor fund with millions of square feet of prime Class A and B office space.  The tenant is a large national firm with strong financial statements.  This particular building happens to be about 40% vacant.  "Send us a lease document for review", we told the landlord agent.  We waited, and waited, and the document never showed up. 

Finally this week, we called the managing partner for the landlord.  "Our partners won't approve the deal", said the managing partner.  Now this can only mean a few things:

Click to read more ...

The Only Two Ways to Protect Yourself on Operating Expense Pass-Throughs

I'm not crazy about condominiums.  Here's why:  Other people (the condo association - which is often controlled by a very small group of individuals) get to vote on how to spend your money.  Some of those choices may not add value for you or to your property.  Operating expenses on leased commercial property work the same way.  The management company, which is the property ownership or someone under their direct control, gets to decide what expenses get passed through to the property tenants.  So what expenses do they pass through?  Every single one that they can possibly get away with.  There are only two methods of protection for tenants, and I'd estimate that more than half of all leases don't fully take advantage of them.

Click to read more ...

Balance Sheet Blues

Just a quick mention in case you have not yet read your recent issue of CFO Magazine that had an article titled, Balance Sheet Blues, you can read it here.

Every finance executive and corporate real estate manager should be following and preparing for the upcoming change of operating lease to capital lease classification.  See my prior posts.

The Accounting Rules, They Are a Changin' - Part 2

As a follow up to my previous post regarding the upcoming reclassification by FASB of operating leases to capital leases, which you can read here, I'll outline a general strategy that companies can use to  minimize the reporting impact and unpleasant surprises.  Here's what I recommend as a checklist of Top Ten Operating Lease to Capital Lease Actions:

Click to read more ...

The Accounting Rules, They Are A-Changin' - Part 1

For the last 35 years, public companies in the U.S. have reported lease obligations differently that other countries, not unlike the way that we stubbornly hang on to English measurements while most of the rest of the planet uses the Metric system.  That is about to change, and change can be painful. 

Here is the premise of the change:  Virtually all leases will be treated as Capital Leases rather than Operating Leases.  Lessees must account for their right to use a leased item as an asset and their obligation to pay future rental installments for that item as a liability.  Simple enough, right?  Remember, this is written by the Financial Accounting Standards Board.  They do nothing simple.  Fortunately they also move with all the speed of, well, the government.  This will give proactive corporations the opportunity to position themselves to avoid pitfalls and structure their future transactions to their advantage.  The discussion paper, which you can view here, is over 100 pages thick. 

I warned of the impending issue back in 2007, in my article titled, The Death of Operating Leases.   Here are some considerations: 

Click to read more ...

The Great Depression Ahead

I had lunch last week with Harry Dent, the Harvard MBA economist and NY Times bestselling author, to discuss the impact that the age shift of the population will have on commercial real estate. For those of you not familiar with Harry's work, he's written a number of books including The Great Boom Ahead in 1993, The Roaring 2000's in 1999, and The Next Great Bubble Boom in 2004. Each of these books detailed well in advance the enormous gains in both stock and real estate markets that we experienced and their eventual collapse. While predicting the confluence of so many forces on the economy is not an exact science, Harry nailed the overall concepts and general timing of both the run up and downfall of these markets. Unfortunately for the U.S. economy, the title of his latest book, The Great Depression Ahead, gives away a bit of the plot of what is in store for us.

Click to read more ...

Another Great Thing About this Economy #47 - Corporate Politics

Even when the economy was absolutely booming, we advocated a lean and mean approach to real estate. That's why this blog is titled, "Less is More". Now however, many political obstacles to reaching Lean & Mean objectives have been removed. The corporate real estate director (in virtually all corporations large enough to have corporate real estate directors), now likely has complete buy-in from both the finance and operations executives AND field staff.

Click to read more ...

Cut Your Rent in Half - Blend & Extend

Many companies believe that either 1) They must live with whatever terms are stated in their existing lease until it expires or, 2) They can go to their landlord, tell them that they can't afford to pay their existing high rental rate, and the landlord will willingly drop their rent to current market rates. Which is correct? Well....generally neither, exactly as described. Here's how to get the most benefits:

Click to read more ...

Parting is Such Sweet Sorrow

In three separate incidents that I've witnessed recently, landlords have demonstrated their growing financial desperation. Two of the cases involved clients moving out of a property and debate over the "reasonable wear and tear" condition of the premises on vacating. The other issue involved a proposed new lease with a rider describing the required condition in which the space must be returned - in essence describing most of the preparation that a landlord would typically do to prepare a space for a new tenant.

The underlying issue here is not about the tenant's treatment of the space, it is about the landlord's increasing financial pressure to preserve precious cash.

Click to read more ...

What is Your Renewal Option Worth?

It is a great time to be a tenant, and here is another example. Because almost all lease renewal options are written with the assumption that rental rates will climb forever upwards, we're seeing some interesting effects as rates tumble.  Like many stock options, some renewal options are literally not worth the paper they were written on. However, declining markets have made some usually unattractive renewal options have new value. Here's why:

Click to read more ...