Counting Leases Before They Hatch
A proposed accounting change will dramatically affect how landlords and tenants treat leases.
by Tom Muller
The accounting profession is currently evaluating a proposed new standard that promises to fundamentally change the ways landlords and tenants account for — and negotiate — leases.Under review is a proposed rewriting of the Financial Standards Accounting Board’s Accounting Standards Codification Topic 840, which before 2009 was known as FAS 13. This topic, "Accounting for Leases," is one of many standards that together comprise generally accepted accounting principles, or GAAP, in the United States.
The draft standard has drawn much heated debate for its potential to fundamentally change the leasing market, likely shortening lease terms and dramatically reducing the apparent value of properties with traditionally long lease terms, such as office buildings.
What Is Being Proposed?
According to FASB, the proposed new rule responds to dissatisfaction with the way that operating leases are disclosed on companies’ financial statements. Current financial standards draw a distinction between operating leases — the standard landlord/tenant relationship — and capital leases, typically used as an alternative form of financing. Current rules effectively ignore the documented structure of capital leases, instead treating the leased property as if it were owned by the tenant and financed by the landlord.
FASB notes that many companies have carefully structured their leases in view of the current rules to achieve characterization as either operating leases or capital leases, resulting in strikingly different effects on the company’s financial statements. The proposed rules to a large degree would prevent this by treating all leases with a term over one year as capital leases.
The proposed new standard treats the execution of a lease as the conveyance to the tenant of an asset — the right to use the property — and the creation of a liability — the obligation to pay rent over the term. The standard creates one analysis for the inception of the transaction and a slightly different one for ongoing reporting. It also requires both landlord and tenant to adjust underlying assumptions about the future of the lease as facts that might affect those assumptions change.
Tenant Changes
For the tenant the new standard would require the following considerations.
* At the beginning of the lease, the tenant must recognize as a liability the present value of all lease payments it is obligated to make, taking into account any extension or termination options it is likely to exercise, and estimating any contingent rent or termination payments it expects to make. The discount rate to be used for the present value calculation is the interest rate the tenant would have to pay a lender for a comparable real estate secured loan.
* The tenant recognizes the right to use the property for the term of the lease as an asset, measured, at the beginning of the lease, at the present value of the lease payments, plus the “initial direct costs” it incurs in negotiating the lease, for example, broker’s commissions and legal fees.
* During the term of the lease, the tenant amortizes the right to use the property over the shorter of its remaining useful life or the term of the lease.
* During the term of the lease, the tenant must reflect any changes as they occur. For example, if, a few years into the lease, a tenant’s business changes so as to make it likely that it will pay more contingent rent over the term of the lease, its financial statements must immediately reflect that change. Or, if a change in the tenant’s business makes it more likely that it will not exercise an extension option it previously expected to exercise, it may be required to adjust its financial statements to reflect that.
CFO Best Practice Sponsor:
Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com
to read the full article please visit www.cire.com
Wednesday, December 29, 2010
Friday, December 17, 2010
CFOs Need to be Problem Solvers
Interesting article from CFO magazine about role of CFO as leader and problem solver
By David McCann
For finance chiefs with designs on the chief executive's chair, serving a stint in operations is often a prerequisite. But the lack of an important quality may be blocking many CFOs from successfully doing so, in the view of one former CFO-turned-CEO.
That quality is empathy for customers, and for the employees who serve them, says Cary McMillan, a onetime Sara Lee CFO who now runs tax-advisory firm True Partners. While it's become a cliché for CEOs to say they want a finance leader who can act as a business partner, failing to understand customer behavior and wishes may be a significant handicap in performing that role, he says.
Finance chiefs "tend to be supersmart people who don't always help solve problems," asserts McMillan, who left his CFO post in 2002 to become CEO of Sara Lee's then-huge apparel business. And when it comes to being a business partner, he adds, problem solving is "a million times more valuable than being technically correct on every finance issue."
Putting the highest priority on always being right from a technical standpoint is a habit that's difficult for CFOs to kick, McMillan acknowledges, since that's how they're trained. But in the end, he says, that is a "me" mind-set, whereas a "we" mentality is what pushes companies forward.
McMillan developed an appreciation for the "we" approach during 19 years at Arthur Andersen, where he rose to become head of the firm's audit practice and managing partner of the Chicago headquarters office. "I was one of the few line partners who were actually interested in how the firm was run," he recalls. "Almost everybody else — because this is how we trained them — was interested only in their own activities. I got involved in management by throwing myself in there."
Cary McMillan, True Partners
That facility for stepping out of the box clinched Sara Lee's decision to offer him the CFO job, says McMillan. "They could see me as more than just a client-service provider; as somebody who was interested in working on the entire entity, not just one part of it."
It was a heady role for a career audit-firm partner, with Sara Lee sometimes mentioned in the same breath as such finance-professional incubators as PepsiCo, General Electric, Kraft, and Johnson & Johnson. The conglomerate's highly decentralized structure put finance executives in the spotlight, says McMillan, with sales, marketing, purchasing, and supply-chain functions all pushed out to the many business units.
Indeed, he took the job worrying whether he was qualified to be CFO. He had never had to deal with treasury matters or investor relations, for example. "I thought I only had about half the experience I really needed," he says. "But I found that the half I had, in accounting and internal controls, was helpful with the other side."
He earned some treasury chops by helping to arrange hedges on the company's receivables with Kmart in advance of the retail giant's bankruptcy. Although Sara Lee Branded Apparel was one of Kmart's largest creditors, "we didn't lose a penny," says McMillan. And the passage of Regulation FD during his first year on the job turned out to be blessedly timed, because everyone was in the same boat grappling with the transition to a new mandate for disclosure to investors.
to read full article please visit http://www.cfo.com/article.cfm/14544598/c_14545252
By David McCann
For finance chiefs with designs on the chief executive's chair, serving a stint in operations is often a prerequisite. But the lack of an important quality may be blocking many CFOs from successfully doing so, in the view of one former CFO-turned-CEO.
That quality is empathy for customers, and for the employees who serve them, says Cary McMillan, a onetime Sara Lee CFO who now runs tax-advisory firm True Partners. While it's become a cliché for CEOs to say they want a finance leader who can act as a business partner, failing to understand customer behavior and wishes may be a significant handicap in performing that role, he says.
Finance chiefs "tend to be supersmart people who don't always help solve problems," asserts McMillan, who left his CFO post in 2002 to become CEO of Sara Lee's then-huge apparel business. And when it comes to being a business partner, he adds, problem solving is "a million times more valuable than being technically correct on every finance issue."
Putting the highest priority on always being right from a technical standpoint is a habit that's difficult for CFOs to kick, McMillan acknowledges, since that's how they're trained. But in the end, he says, that is a "me" mind-set, whereas a "we" mentality is what pushes companies forward.
McMillan developed an appreciation for the "we" approach during 19 years at Arthur Andersen, where he rose to become head of the firm's audit practice and managing partner of the Chicago headquarters office. "I was one of the few line partners who were actually interested in how the firm was run," he recalls. "Almost everybody else — because this is how we trained them — was interested only in their own activities. I got involved in management by throwing myself in there."
Cary McMillan, True Partners
That facility for stepping out of the box clinched Sara Lee's decision to offer him the CFO job, says McMillan. "They could see me as more than just a client-service provider; as somebody who was interested in working on the entire entity, not just one part of it."
It was a heady role for a career audit-firm partner, with Sara Lee sometimes mentioned in the same breath as such finance-professional incubators as PepsiCo, General Electric, Kraft, and Johnson & Johnson. The conglomerate's highly decentralized structure put finance executives in the spotlight, says McMillan, with sales, marketing, purchasing, and supply-chain functions all pushed out to the many business units.
Indeed, he took the job worrying whether he was qualified to be CFO. He had never had to deal with treasury matters or investor relations, for example. "I thought I only had about half the experience I really needed," he says. "But I found that the half I had, in accounting and internal controls, was helpful with the other side."
He earned some treasury chops by helping to arrange hedges on the company's receivables with Kmart in advance of the retail giant's bankruptcy. Although Sara Lee Branded Apparel was one of Kmart's largest creditors, "we didn't lose a penny," says McMillan. And the passage of Regulation FD during his first year on the job turned out to be blessedly timed, because everyone was in the same boat grappling with the transition to a new mandate for disclosure to investors.
to read full article please visit http://www.cfo.com/article.cfm/14544598/c_14545252
Monday, December 13, 2010
Software Programs Help Companies Prepare for New Lease Accounting Changes
Originally published in National Real Estate Investor
By James Duport and Ken Brown
Big changes are on the way for companies that are significant holders of real estate. It’s hard to say exactly when the much talked about and anticipated FASB lease accounting changes will go into effect, but companies with real estate holdings in particular need to be prepared for the significant impact these new rules will have on lease commitments.
Change is never easy, but the transition doesn’t have to be traumatic. On the contrary, required adherence to these new FASB rules, which are being put in place to enforce transparency and full disclosure, actually has a silver lining. It presents the opportunity for companies to update software and technology, which may be outdated anyway, in order to manage their real estate holdings and move to a faster, broader, more accommodating and flexible system.
Under the new proposed law, lease commitments must be on the balance sheet from day one, which is why older technology will no longer do the job. But, before we address effective ways for companies to achieve leasing compliance, it is important to first understand why the laws of lease accounting are changing.
Current lease accounting guidelines were adopted 30 years ago and are outdated by today’s business standards. The biggest difference between the old and new rules pertains to off-balance sheet accounting. The proposed new rules will bring all assets currently under lease onto the balance sheet and take into account international real estate portfolios, too. The new rules will also include a single worldwide leasing standard, which is important as real estate companies continue to go global.
For most companies, and especially those with large, international real estate portfolios, the sheer thought of overhauling the leasing structure of all their properties is overwhelming. But, thankfully, the implementation of advanced lease administration technology can successfully support a company through this process.
It will be difficult, if not impossible, to become compliant with the new lease accounting laws without some level of lease administration software support. When considering which software to implement, be sure the product is Web-based and that it provides a system of record for all of the leased real estate assets.
That includes leases, subleases, purchase agreements, franchise agreements, equipment leases and more. Be sure the software is completely transparent with regard to location information, critical dates and expenses, and that it integrates workflow.
It should have the ability to create pro-forma leases and integrate MS Excel financial models. It should also be able to handle complex reporting and compare multiple lease financials to support decision-making, and standardize all leases in a portfolio to streamline the cumbersome process.
It’s a lot to take into consideration, but there are companies that have been anticipating these changes and updated their technology with the new FASB rules in mind. The right technology should make life easier.
You can audit your current lease administration system and take stock of all of the capabilities you need and would like in an updated product. Then, do the research to locate the technology that will work best with your real estate and lease commitments.
It’s no secret that the new FASB rules promise to radically transform lease accounting and if you are a significant user of real estate, they will radically transform the way you do business, too. But there are lease administration software programs on the market that will make it easier to deal with many of the initial challenges that accompany such a transition.
Jim Duport is the creator and lead developer of Lucernex Technologies Lx LseMod products and the Lucernex financial engine. He created v15, set for release later in the fourth quarter, to support potential FASB changes. Lx LseMod is a corporate lease analysis tool used by companies including GE, MetLife, Robert Half, Cigna, National Semiconductor, United Technologies, Yahoo and Intuit.
Ken Brown designed mass market software in the 1980s and designed SLIM lease administration software. He is executive vice president and CIO of Lucernex and head of Lucernex product development.
By James Duport and Ken Brown
Big changes are on the way for companies that are significant holders of real estate. It’s hard to say exactly when the much talked about and anticipated FASB lease accounting changes will go into effect, but companies with real estate holdings in particular need to be prepared for the significant impact these new rules will have on lease commitments.
Change is never easy, but the transition doesn’t have to be traumatic. On the contrary, required adherence to these new FASB rules, which are being put in place to enforce transparency and full disclosure, actually has a silver lining. It presents the opportunity for companies to update software and technology, which may be outdated anyway, in order to manage their real estate holdings and move to a faster, broader, more accommodating and flexible system.
Under the new proposed law, lease commitments must be on the balance sheet from day one, which is why older technology will no longer do the job. But, before we address effective ways for companies to achieve leasing compliance, it is important to first understand why the laws of lease accounting are changing.
Current lease accounting guidelines were adopted 30 years ago and are outdated by today’s business standards. The biggest difference between the old and new rules pertains to off-balance sheet accounting. The proposed new rules will bring all assets currently under lease onto the balance sheet and take into account international real estate portfolios, too. The new rules will also include a single worldwide leasing standard, which is important as real estate companies continue to go global.
For most companies, and especially those with large, international real estate portfolios, the sheer thought of overhauling the leasing structure of all their properties is overwhelming. But, thankfully, the implementation of advanced lease administration technology can successfully support a company through this process.
It will be difficult, if not impossible, to become compliant with the new lease accounting laws without some level of lease administration software support. When considering which software to implement, be sure the product is Web-based and that it provides a system of record for all of the leased real estate assets.
That includes leases, subleases, purchase agreements, franchise agreements, equipment leases and more. Be sure the software is completely transparent with regard to location information, critical dates and expenses, and that it integrates workflow.
It should have the ability to create pro-forma leases and integrate MS Excel financial models. It should also be able to handle complex reporting and compare multiple lease financials to support decision-making, and standardize all leases in a portfolio to streamline the cumbersome process.
It’s a lot to take into consideration, but there are companies that have been anticipating these changes and updated their technology with the new FASB rules in mind. The right technology should make life easier.
You can audit your current lease administration system and take stock of all of the capabilities you need and would like in an updated product. Then, do the research to locate the technology that will work best with your real estate and lease commitments.
It’s no secret that the new FASB rules promise to radically transform lease accounting and if you are a significant user of real estate, they will radically transform the way you do business, too. But there are lease administration software programs on the market that will make it easier to deal with many of the initial challenges that accompany such a transition.
Jim Duport is the creator and lead developer of Lucernex Technologies Lx LseMod products and the Lucernex financial engine. He created v15, set for release later in the fourth quarter, to support potential FASB changes. Lx LseMod is a corporate lease analysis tool used by companies including GE, MetLife, Robert Half, Cigna, National Semiconductor, United Technologies, Yahoo and Intuit.
Ken Brown designed mass market software in the 1980s and designed SLIM lease administration software. He is executive vice president and CIO of Lucernex and head of Lucernex product development.
CFO Magazine Updates Lease Accounting Changes to Come
With the December 15th deadline for comments on the lease accounting changes fast approaching many commercial real estate owners and tenants are wondering how the changes will impact them.Many would just as soon see the lease accounting rules stay the way they are. But it is clear that the way companies account for real estate leases on their balance sheets is headed for big changes. The experts agree on one thing- the time to prepare for these changes is in 2011 or sooner!
CFO magazine recently published an interesting article on the impact the lease accounting changes will have on commercial real estate buy vs lease decisions, the length of leases, renewal options and the end of net leases. An excerpt of the article is below:
By Marie Leone
CFO Magazine
Accounting-standards setters are under fire, again. The new leasing standard, proposed jointly by the Financial Accounting Standards Board and the International Accounting Standards Board, has been characterized as naïve, lacking value, and in need of serious reevaluation. The outcry comes not from a handful of opponents but from companies on both sides of common lease contracts — those that rent office space, copiers, or airplanes and those that own the assets.
At the center of the maelstrom is the "right-to-use" asset concept, the accounting mechanism that places leased assets and liabilities on the balance sheets of lessees, as if they owned the assets. That would essentially eliminate operating leases. Credit Suisse estimates that, within the S&P 500 alone, the volume of assets returning to balance sheets could surpass $550 billion.
At those levels, asset ratios could be thrown out of whack, potentially sending debt covenants — if not adjusted — into default, says Ross Prindle, a managing director with Duff & Phelps, while also requiring banks to increase their regulatory capital and wreaking havoc on compensation plans tied to the asset measures.In addition, the proposed standard (called Topic 840 by FASB) requires lessors to recognize assets and liabilities in a new way. A lessor must recognize an asset as representing its right to receive lease payments and, when appropriate, record a liability as representing the contractual right of others to use their equipment or real estate.
Then, based on how much residual value the lessor estimates it will retain at the end of the lease, it must also use one of two accounting approaches laid out in the draft: either the performance obligation or the derecognition model. If the rules seem complicated, that's because they are, says D.J. Gannon, a deputy managing partner with Deloitte. However, he says the proposed changes are well intentioned: rulemakers want to curb abusive leasing practices by companies that structure around the 90% ownership test that currently determines whether a contract is an operating lease and can therefore be removed from their balance sheets.
Be that as it may, in the year-plus since FASB issued its first discussion paper on the topic, more than 300 comment letters have been submitted, most indicating that stakeholders are not convinced that the intended benefits will be worth the additional cost and effort.The comment period is open until December 15, and two days later FASB and the IASB will hold the first of four new "outreach" meetings to get a better handle on what worries constituents. The boards plan to release a final rule during the first half of 2011.
Lessor Has More
What's interesting is that most critics are less concerned about the concept of capitalizing all leases than with how FASB and the IASB propose to treat the leases after bringing them back on balance sheets.
"The board is naïve if they don't think the same kind of structuring will occur under these rules as exists with the bright-line test," asserts Shawn Halladay, a principal at The Alta Group, a leasing-industry consultancy. Halladay says that lessees have only to structure leases for shorter terms to push more of the asset value from their balance sheets. That's because shorter-term leases require the lessor to retain a larger portion of the asset's residual value.
Lessor accounting gets more complicated if the company retains a "significant" amount of the asset's risk or benefit. At that point, a lessor is required to use the performance obligation approach, which forces the company to carry both the asset and the total lease payment receivable (at the receivable's present value) on its balance sheet, as well as a performance obligation liability. In contrast, current capital lease rules require the lessor to carry a lease payment receivable on its balance sheet, but not the underlying asset.
The other accounting model available to lessors is the derecognition approach, which is used when the lessor retains a low residual value on the asset. The impact of the two-method treatment is sure to create "a greater divergence in practice among lessors," says Michael Fleming, also a principal at The Alta Group.
Lessors that hold real estate for investment — most notably in real estate investment trusts — may get a chance to avoid leasing rules completely, says Mindy Berman, managing director at Jones Lang Lasalle, a real estate services firm. Soon FASB will issue a proposal that requires real estate investment holdings to be measured at fair value, testing periodically for impairment, instead of following lessor accounting rules.
to read the full article please visit www.cfo.com
CFO magazine recently published an interesting article on the impact the lease accounting changes will have on commercial real estate buy vs lease decisions, the length of leases, renewal options and the end of net leases. An excerpt of the article is below:
By Marie Leone
CFO Magazine
Accounting-standards setters are under fire, again. The new leasing standard, proposed jointly by the Financial Accounting Standards Board and the International Accounting Standards Board, has been characterized as naïve, lacking value, and in need of serious reevaluation. The outcry comes not from a handful of opponents but from companies on both sides of common lease contracts — those that rent office space, copiers, or airplanes and those that own the assets.
At the center of the maelstrom is the "right-to-use" asset concept, the accounting mechanism that places leased assets and liabilities on the balance sheets of lessees, as if they owned the assets. That would essentially eliminate operating leases. Credit Suisse estimates that, within the S&P 500 alone, the volume of assets returning to balance sheets could surpass $550 billion.
At those levels, asset ratios could be thrown out of whack, potentially sending debt covenants — if not adjusted — into default, says Ross Prindle, a managing director with Duff & Phelps, while also requiring banks to increase their regulatory capital and wreaking havoc on compensation plans tied to the asset measures.In addition, the proposed standard (called Topic 840 by FASB) requires lessors to recognize assets and liabilities in a new way. A lessor must recognize an asset as representing its right to receive lease payments and, when appropriate, record a liability as representing the contractual right of others to use their equipment or real estate.
Then, based on how much residual value the lessor estimates it will retain at the end of the lease, it must also use one of two accounting approaches laid out in the draft: either the performance obligation or the derecognition model. If the rules seem complicated, that's because they are, says D.J. Gannon, a deputy managing partner with Deloitte. However, he says the proposed changes are well intentioned: rulemakers want to curb abusive leasing practices by companies that structure around the 90% ownership test that currently determines whether a contract is an operating lease and can therefore be removed from their balance sheets.
Be that as it may, in the year-plus since FASB issued its first discussion paper on the topic, more than 300 comment letters have been submitted, most indicating that stakeholders are not convinced that the intended benefits will be worth the additional cost and effort.The comment period is open until December 15, and two days later FASB and the IASB will hold the first of four new "outreach" meetings to get a better handle on what worries constituents. The boards plan to release a final rule during the first half of 2011.
Lessor Has More
What's interesting is that most critics are less concerned about the concept of capitalizing all leases than with how FASB and the IASB propose to treat the leases after bringing them back on balance sheets.
"The board is naïve if they don't think the same kind of structuring will occur under these rules as exists with the bright-line test," asserts Shawn Halladay, a principal at The Alta Group, a leasing-industry consultancy. Halladay says that lessees have only to structure leases for shorter terms to push more of the asset value from their balance sheets. That's because shorter-term leases require the lessor to retain a larger portion of the asset's residual value.
Lessor accounting gets more complicated if the company retains a "significant" amount of the asset's risk or benefit. At that point, a lessor is required to use the performance obligation approach, which forces the company to carry both the asset and the total lease payment receivable (at the receivable's present value) on its balance sheet, as well as a performance obligation liability. In contrast, current capital lease rules require the lessor to carry a lease payment receivable on its balance sheet, but not the underlying asset.
The other accounting model available to lessors is the derecognition approach, which is used when the lessor retains a low residual value on the asset. The impact of the two-method treatment is sure to create "a greater divergence in practice among lessors," says Michael Fleming, also a principal at The Alta Group.
Lessors that hold real estate for investment — most notably in real estate investment trusts — may get a chance to avoid leasing rules completely, says Mindy Berman, managing director at Jones Lang Lasalle, a real estate services firm. Soon FASB will issue a proposal that requires real estate investment holdings to be measured at fair value, testing periodically for impairment, instead of following lessor accounting rules.
to read the full article please visit www.cfo.com
Monday, November 1, 2010
Still Many Questions Among CFOs About Bank Reform
As reported by Vincent Ryan in CFO Magazine
Two years after the fall of Lehman Brothers, the immense overhaul of the banking system is just beginning, and it is far too early for companies to breathe a collective sigh of relief. The banking system is safer — but not by a lot. Banks now have larger capital buffers, and the complex collateralized debt obligations (CDOs) that wrought so much destruction are nearly extinct. Yet 11% of retail banks remain at risk of failure, says the Federal Deposit Insurance Corp. (FDIC).
The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act represents not a regulatory finish line so much as the firing of a starter's pistol that will kick off a marathon of rule-making and second-guessing. Key questions remain about how much reform will come to pass, when, and what it will ultimately mean for companies. "Regulation is always in catch-up mode — there's no way around it," says Cory Gunderson, managing director of the U.S. financial services and global risk and compliance practices at Protiviti.
As for what has been settled and what hasn't, three key areas of uncertainty deserve watching: whether public bailouts of megabanks can be avoided in the future, what regulators have done to return commercial lending to normal, and whether Wall Street has been reined in too much, too little, or just enough.
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large financial organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com or call David Worrell at 888.472.5656
Too Big to Fail?
Dodd-Frank created the Financial Stability Oversight Council, a mandated team of traditionally autonomous financial regulators who now are expected to work together to ensure that the financial system does not develop pockets of dangerous dependency. The group, which held its first meeting last month, has the daunting goal (given recent history) of eliminating "expectations on the part of shareholders, creditors, and counterparties of [large banks] that the government will shield them from losses in the event of failure," the U.S. Treasury says.
Dodd-Frank attempts to ensure that by imposing greater regulatory supervision on bank holding companies with assets greater than $50 billion. It also requires nonbank financial firms and systemically important firms within the next 18 months to develop plans for rapid, orderly unwinding of their businesses in cases of severe financial distress. But will this and any of the other proposed measures prevent the U.S. government from lavishing taxpayer funds on failed banks and being the arbiter of which banks fail and which get life-saving injections of capital?
http://www.cfo.com/article.cfm/14533054?f=search
Two years after the fall of Lehman Brothers, the immense overhaul of the banking system is just beginning, and it is far too early for companies to breathe a collective sigh of relief. The banking system is safer — but not by a lot. Banks now have larger capital buffers, and the complex collateralized debt obligations (CDOs) that wrought so much destruction are nearly extinct. Yet 11% of retail banks remain at risk of failure, says the Federal Deposit Insurance Corp. (FDIC).
The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act represents not a regulatory finish line so much as the firing of a starter's pistol that will kick off a marathon of rule-making and second-guessing. Key questions remain about how much reform will come to pass, when, and what it will ultimately mean for companies. "Regulation is always in catch-up mode — there's no way around it," says Cory Gunderson, managing director of the U.S. financial services and global risk and compliance practices at Protiviti.
As for what has been settled and what hasn't, three key areas of uncertainty deserve watching: whether public bailouts of megabanks can be avoided in the future, what regulators have done to return commercial lending to normal, and whether Wall Street has been reined in too much, too little, or just enough.
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large financial organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com or call David Worrell at 888.472.5656
Too Big to Fail?
Dodd-Frank created the Financial Stability Oversight Council, a mandated team of traditionally autonomous financial regulators who now are expected to work together to ensure that the financial system does not develop pockets of dangerous dependency. The group, which held its first meeting last month, has the daunting goal (given recent history) of eliminating "expectations on the part of shareholders, creditors, and counterparties of [large banks] that the government will shield them from losses in the event of failure," the U.S. Treasury says.
Dodd-Frank attempts to ensure that by imposing greater regulatory supervision on bank holding companies with assets greater than $50 billion. It also requires nonbank financial firms and systemically important firms within the next 18 months to develop plans for rapid, orderly unwinding of their businesses in cases of severe financial distress. But will this and any of the other proposed measures prevent the U.S. government from lavishing taxpayer funds on failed banks and being the arbiter of which banks fail and which get life-saving injections of capital?
http://www.cfo.com/article.cfm/14533054?f=search
CFO Zone Reports Cash Flow Top CFO Concern
as repoted on www.cfozone.com
It's all about the cash flow.
The biggest concern among chief financial officers these days is cash flow. Not the economy, not jobs, not health care, not the elections.According to a survey conducted by TD Bank, 69 percent of CFOs and other corporate finance managers at mid-sized businesses say they are most worried about the intense challenge of managing cash flow.The survey of 100 CFOs, controllers, treasurers and other financial executives also found that proper capital allocation and cash flow management will also be next year's top financial management priorities for 41 percent of respondents.
When it comes to cash flow, the survey respondents said the most significant risks over the next year will be an increase in non-performing accounts receivables (21 percent) and reduced sales (19 percent). Only 5 percent of respondents cite the economy as the biggest threat.While CFOs are worried about cash flow, they are not planning to take drastic action. Just seven percent of the finance executives say they plan to cut expenses in 2011.
In fact, 39 percent expect their capital investments to increase next year. Of that group, 21 percent expect an increase of 10 percent or more.One-third anticipates that capital investments will hold steady. Of course, this means roughly 28 percent are planning to cut capital investments.And the most common use for this money figures to be for new technology. This is followed by improvements to existing facilities, workforce hiring and development and office equipment.
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com or call David Worrell at 888.472.5656
What are the most likely constraints on capital investments? The finance pros most often cited cash flow (46 percent), followed by unsure levels of funding from clients and government (18 percent), as well as the political climate, including government regulations and policies (13 percent).
Otherwise, CFOs seem to share the kinds of sentiments most people seem to hold these days. For example, 78 percent acknowledge the economic recovery could take up to two years to materialize while nearly half believe the surest signs of a lasting upturn will be falling unemployment rates, sustained growth in their own organization's sales and an influx of new customers buying their products and services.
Other financial challenges include interest rate volatility, a key concern among more than half of the respondents (55 percent), followed by adequate access to credit for 52 percent.
http://www.cfozone.com/index.php/Newsflash/CFOs-Cash-flow-is-top-concern.html
It's all about the cash flow.
The biggest concern among chief financial officers these days is cash flow. Not the economy, not jobs, not health care, not the elections.According to a survey conducted by TD Bank, 69 percent of CFOs and other corporate finance managers at mid-sized businesses say they are most worried about the intense challenge of managing cash flow.The survey of 100 CFOs, controllers, treasurers and other financial executives also found that proper capital allocation and cash flow management will also be next year's top financial management priorities for 41 percent of respondents.
When it comes to cash flow, the survey respondents said the most significant risks over the next year will be an increase in non-performing accounts receivables (21 percent) and reduced sales (19 percent). Only 5 percent of respondents cite the economy as the biggest threat.While CFOs are worried about cash flow, they are not planning to take drastic action. Just seven percent of the finance executives say they plan to cut expenses in 2011.
In fact, 39 percent expect their capital investments to increase next year. Of that group, 21 percent expect an increase of 10 percent or more.One-third anticipates that capital investments will hold steady. Of course, this means roughly 28 percent are planning to cut capital investments.And the most common use for this money figures to be for new technology. This is followed by improvements to existing facilities, workforce hiring and development and office equipment.
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com or call David Worrell at 888.472.5656
What are the most likely constraints on capital investments? The finance pros most often cited cash flow (46 percent), followed by unsure levels of funding from clients and government (18 percent), as well as the political climate, including government regulations and policies (13 percent).
Otherwise, CFOs seem to share the kinds of sentiments most people seem to hold these days. For example, 78 percent acknowledge the economic recovery could take up to two years to materialize while nearly half believe the surest signs of a lasting upturn will be falling unemployment rates, sustained growth in their own organization's sales and an influx of new customers buying their products and services.
Other financial challenges include interest rate volatility, a key concern among more than half of the respondents (55 percent), followed by adequate access to credit for 52 percent.
http://www.cfozone.com/index.php/Newsflash/CFOs-Cash-flow-is-top-concern.html
Thursday, October 28, 2010
Bank CFO Talk About Commercial Real Estate Lending
As reported on www.costar.com,
Article by Mark Heschmeyer
"Maybe it is time we start taking bankers at their word that commercial real estate wasn't and isn't a catastrophe waiting to happen. Maybe, just maybe, as they've been telling us for the last four consecutive quarters, there are serious risks but they are manageable and are being dealt with and disposed of.
Why, now?
Because third quarter commercial bank earnings reports released in the last week seem to back up that talk. Individually, there are definitely still banks in trouble. But collectively banks seem to be on the tail end of their commercial real estate troubles. Distressed loan levels have stabilized, the amount of new delinquencies is decreasing and more banks are beginning to push troubled assets back into the marketplace.
Banks' exposure to CRE loans has been a source of concern for many observers, said James Abbott, senior vice president, investor relations and external communications for Zions Bancorporation, but "so far that is not playing out in our portfolio and has been reasonably benign around the industry."
In fact, there are a lot of indications the commercial real estate market is stabilizing and even strengthening, Abbott said.
"If you look at CMBS spreads and some other indicia of this, it's appearing that maybe we're not going to see the kind of storm some had predicted," he said. "But I think it's going to take another two or three quarters perhaps before it's really clear that there aren't substantial losses around the industry in that product type."
Some banks even reported in their quarterly earnings conference calls that they are gearing up for increasing their commercial real estate lending activity or seeing renewed interest in borrowing. Such banks are still the exception, not the norm, but we haven't heard this kind of chatter since 2007.
"I would say that we've continued to be very judicious in the commercial real estate area," said Jerry Plush, senior executive vice president, CFO and chief risk officer of Webster Financial Corp.
"[We] continue to look for opportunities that make sense for us, and we're continuing to see that there is definitely some build-up in the pipeline there that we could see in the coming quarters," Plush added. "We're not saying that there is going to be substantial growth," Plush said. "It would be either to maintain balances or slightly above, but soon you will start to see the emergence of those small business and middle-market numbers rising in the commercial category."
Rene Jones, chief financial officer of M&T Bank Corp., said her bank is seeing customers paying down debt and repositioning themselves for future expansion.
"We’ve seen in the commercial real estate space a number of pretty well healed commercial real estate folks actually just looking at the liquidity and their portfolio, maybe selling down some projects to improve the overall liquidity position," Jones said. "But overall, our commitments aren't up, so I think people are just on hold. The rates are low, they’re trying to lock in some credit today but they’re not necessarily using it because they’re not yet investing."
Beth Mooney, vice chairman of KeyCorp, said they are definitely starting to see stability in commercial real estate, particularly the middle market loan book.
"We have obviously seen that client base de-lever over the last seven to eight quarters. But if you look into the trends from the first, to the second, to third quarter, we had the lowest level of decline in this quarter that we’ve seen through the cycle and we are actually starting to see, particularly in our Great Lakes and Northeastern regions, signs of increased new business activity and modest glimmers of loan growth," Mooney said. "However, on net you still see pressures in the Western markets. They were late into the cycle, but we do see some pickup in business activity and clearly signs of stability in the middle market book, as well as in the core leasing portfolio, which intersects with a lot of that same client base of renewed activity."
Bank executives also highlighted a greater willingness to sell buildings and reported more success in disposing of troubled assets on their third quarter earnings conference calls.
"We’re very pleased with the overall results of our problem assets disposition strategy, and the momentum we are building toward this effort," said Clarke Starnes, chief risk officer and senior executive vice president at BB&T Corp. "In the third quarter, we actually assembled a team of about 12 sales specialists, together with some significant operational and marketing support to begin a sales program for about $1.3 billion in commercial nonperforming loans that were transferred to the held for sale category."
"Our effort consists of a four-pronged strategy. It’s in this priority: short sales to the borrowers; third-party direct; third-party bulk, and then some other option," Starnes added. "We get our best pricing execution when we’re dealing more directly with the borrowers, but it takes a longer time to do that. At auctions you can do it much quicker, but you’ve got to do your discounts. So what we’re really trying to do is blend these various liquidation alternatives to achieve the best execution that we can, while balancing the time to liquidate."
Bob Kaminski, COO, executive vice president at Mercantile Bank Corp., said: "I think our staff has done a good job of working with borrowers on properties that were even in foreclosure to try to affect sales of those properties so that they may be never make it into the ORE bucket. Loans that do make it into foreclosure due to foreclosure process, many times have buyers that are waiting at the end of the redemption period to complete those sales."
"So it’s really on a page-by-page basis," Kaminski added. "You have some properties that are little bit hard to sell, may be spending a little bit of a longer time in the ORE buckets, and others that are more attractive from a purchasing standpoint tending to spend a lot less time in those categories."
Mary Tuuk, chief risk officer of Fifth Third Bancorp, said they have been very focused on higher risk portfolios such as non-owner occupied real estate.
"We’ve worked hard over time to achieve the best solutions possible on troubled credits," Tuuk said. "As part of that process, [the special assets group] continually identifies the loans most likely to result in a successful workout given enough time and which loans are less likely to result in an acceptable outcome. For that latter group of loans, our options include a long-term workout strategy or a shorter-term solution, one of which is the possibility of selling a loan and the redeploying the resources that would be devoted to a longer-term solution."
"We are marketing these loans in several pools targeted at particular (buyer basis). Land loans in one pool, vertical CRE in another, syndicated loans in another and a final pool that we intend to sell to investors, loan-by-loan," Tuuk said. "These loans, particularly the nonperforming ones, would generally represent the more troubled parts of our commercial portfolio with a high content of commercial real estate in general, particularly land and construction."
Article by Mark Heschmeyer
"Maybe it is time we start taking bankers at their word that commercial real estate wasn't and isn't a catastrophe waiting to happen. Maybe, just maybe, as they've been telling us for the last four consecutive quarters, there are serious risks but they are manageable and are being dealt with and disposed of.
Why, now?
Because third quarter commercial bank earnings reports released in the last week seem to back up that talk. Individually, there are definitely still banks in trouble. But collectively banks seem to be on the tail end of their commercial real estate troubles. Distressed loan levels have stabilized, the amount of new delinquencies is decreasing and more banks are beginning to push troubled assets back into the marketplace.
Banks' exposure to CRE loans has been a source of concern for many observers, said James Abbott, senior vice president, investor relations and external communications for Zions Bancorporation, but "so far that is not playing out in our portfolio and has been reasonably benign around the industry."
In fact, there are a lot of indications the commercial real estate market is stabilizing and even strengthening, Abbott said.
"If you look at CMBS spreads and some other indicia of this, it's appearing that maybe we're not going to see the kind of storm some had predicted," he said. "But I think it's going to take another two or three quarters perhaps before it's really clear that there aren't substantial losses around the industry in that product type."
Some banks even reported in their quarterly earnings conference calls that they are gearing up for increasing their commercial real estate lending activity or seeing renewed interest in borrowing. Such banks are still the exception, not the norm, but we haven't heard this kind of chatter since 2007.
"I would say that we've continued to be very judicious in the commercial real estate area," said Jerry Plush, senior executive vice president, CFO and chief risk officer of Webster Financial Corp.
"[We] continue to look for opportunities that make sense for us, and we're continuing to see that there is definitely some build-up in the pipeline there that we could see in the coming quarters," Plush added. "We're not saying that there is going to be substantial growth," Plush said. "It would be either to maintain balances or slightly above, but soon you will start to see the emergence of those small business and middle-market numbers rising in the commercial category."
Rene Jones, chief financial officer of M&T Bank Corp., said her bank is seeing customers paying down debt and repositioning themselves for future expansion.
"We’ve seen in the commercial real estate space a number of pretty well healed commercial real estate folks actually just looking at the liquidity and their portfolio, maybe selling down some projects to improve the overall liquidity position," Jones said. "But overall, our commitments aren't up, so I think people are just on hold. The rates are low, they’re trying to lock in some credit today but they’re not necessarily using it because they’re not yet investing."
Beth Mooney, vice chairman of KeyCorp, said they are definitely starting to see stability in commercial real estate, particularly the middle market loan book.
"We have obviously seen that client base de-lever over the last seven to eight quarters. But if you look into the trends from the first, to the second, to third quarter, we had the lowest level of decline in this quarter that we’ve seen through the cycle and we are actually starting to see, particularly in our Great Lakes and Northeastern regions, signs of increased new business activity and modest glimmers of loan growth," Mooney said. "However, on net you still see pressures in the Western markets. They were late into the cycle, but we do see some pickup in business activity and clearly signs of stability in the middle market book, as well as in the core leasing portfolio, which intersects with a lot of that same client base of renewed activity."
Bank executives also highlighted a greater willingness to sell buildings and reported more success in disposing of troubled assets on their third quarter earnings conference calls.
"We’re very pleased with the overall results of our problem assets disposition strategy, and the momentum we are building toward this effort," said Clarke Starnes, chief risk officer and senior executive vice president at BB&T Corp. "In the third quarter, we actually assembled a team of about 12 sales specialists, together with some significant operational and marketing support to begin a sales program for about $1.3 billion in commercial nonperforming loans that were transferred to the held for sale category."
"Our effort consists of a four-pronged strategy. It’s in this priority: short sales to the borrowers; third-party direct; third-party bulk, and then some other option," Starnes added. "We get our best pricing execution when we’re dealing more directly with the borrowers, but it takes a longer time to do that. At auctions you can do it much quicker, but you’ve got to do your discounts. So what we’re really trying to do is blend these various liquidation alternatives to achieve the best execution that we can, while balancing the time to liquidate."
Bob Kaminski, COO, executive vice president at Mercantile Bank Corp., said: "I think our staff has done a good job of working with borrowers on properties that were even in foreclosure to try to affect sales of those properties so that they may be never make it into the ORE bucket. Loans that do make it into foreclosure due to foreclosure process, many times have buyers that are waiting at the end of the redemption period to complete those sales."
"So it’s really on a page-by-page basis," Kaminski added. "You have some properties that are little bit hard to sell, may be spending a little bit of a longer time in the ORE buckets, and others that are more attractive from a purchasing standpoint tending to spend a lot less time in those categories."
Mary Tuuk, chief risk officer of Fifth Third Bancorp, said they have been very focused on higher risk portfolios such as non-owner occupied real estate.
"We’ve worked hard over time to achieve the best solutions possible on troubled credits," Tuuk said. "As part of that process, [the special assets group] continually identifies the loans most likely to result in a successful workout given enough time and which loans are less likely to result in an acceptable outcome. For that latter group of loans, our options include a long-term workout strategy or a shorter-term solution, one of which is the possibility of selling a loan and the redeploying the resources that would be devoted to a longer-term solution."
"We are marketing these loans in several pools targeted at particular (buyer basis). Land loans in one pool, vertical CRE in another, syndicated loans in another and a final pool that we intend to sell to investors, loan-by-loan," Tuuk said. "These loans, particularly the nonperforming ones, would generally represent the more troubled parts of our commercial portfolio with a high content of commercial real estate in general, particularly land and construction."
Wednesday, October 20, 2010
National Real Estate Investor Covers New Lease Accounting Rules
From www.nreionline.com
Proposed new accounting standards have been drafted in order to push lease liabilities back onto corporate balance sheets. Such a change would represent a major shift for companies that have typically favored the off-balance-sheet treatment of operating leases, and it could have a significant impact on corporate decisions to lease or purchase real estate in the future.
The proposed guidelines are a joint initiative by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board to create a uniform global standard and greater corporate transparency in lease accounting procedures. The most recent draft issued Aug. 17 would establish one method of accounting that requires firms to recognize all lease liabilities and assets on their corporate financial statements.
Another key component is that companies would be required to record the lease value or rent commitment over the entire lease term, including renewal options. Although the intent is to stop off-balance-sheet activity, the changes would add significant weight to corporate balance sheets.
For example, a firm that pays $1 million per year in rent for its corporate headquarters would quickly see its liability multiply depending on whether it has a five-year or 15-year lease. Companies would appear more highly leveraged, which could affect factors such as corporate credit and existing debt covenants.
Crux of the matter
What makes commercial real estate industry professionals nervous is that it is not clear to what extent the new accounting guidelines would influence tenants’ decision-making process. Based on the universe of leased space, the potential impact is enormous.
Although FASB cites data that values leasing activity at $640 billion in 2008, other industry sources estimate that current volume as high as $1.3 trillion in operating leases for U.S. firms alone. Once the guidelines go into effect, which many in the industry believe will occur in 2013, both new and existing leases would be immediately affected.
One fear is that the new accounting practices could deter companies from signing long-term leases, or encourage firms to own rather than lease facilities. Both of those factors could be a detriment to the sale-leaseback and net-lease finance niche where leases typically extend 15 years and beyond.
Sale-leaseback transactions have accounted for $24.8 billion, or slightly more than 50%, of the $46.6 billion in single-tenant sales globally over the past 12 months from June 2009 through June 30, 2010, according to New York-based Real Capital Analytics.
Please visit www.nreionline.com for the complete article.
The lease accounting changes are expected to effect how companies view their real estate holdings and real estate asset management strategies in the future. Some analysts predict the changes will not be reflected on the balance sheets until 2013, but companies need to start the planning process now. Certainly there is need for a complete lease audit process to determine how many individual leases exist and how they could be impacted when they no longer are considered operating leases.
But important decisions will need to made on excess real estate space. In the past one option was subleasing the space to another tenant. Not a perfect solution but subleasing had some advantages. When the lease accounting rules change, subleasing will not remove the lease from the balance sheet and increases risk for the company in their new role as a landlord to the company that is subleasing space.
A better solution would be a Negotiated Lease Buy-Out or Lease Termination program. These are complicated transactions and you should employ someone with direct experience in corporate real estate finance and taxation. One company that has a long track record negotiating commercial real estate lease terminations is Cambridge Consulting Group. They have saved companies such as Bank Of America and Ford Motor Credit millions of dollars by reducing their lease obligations. For more information please visit their commercial lease termination website- www.commercialleaseterminations.com.
Proposed new accounting standards have been drafted in order to push lease liabilities back onto corporate balance sheets. Such a change would represent a major shift for companies that have typically favored the off-balance-sheet treatment of operating leases, and it could have a significant impact on corporate decisions to lease or purchase real estate in the future.
The proposed guidelines are a joint initiative by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board to create a uniform global standard and greater corporate transparency in lease accounting procedures. The most recent draft issued Aug. 17 would establish one method of accounting that requires firms to recognize all lease liabilities and assets on their corporate financial statements.
Another key component is that companies would be required to record the lease value or rent commitment over the entire lease term, including renewal options. Although the intent is to stop off-balance-sheet activity, the changes would add significant weight to corporate balance sheets.
For example, a firm that pays $1 million per year in rent for its corporate headquarters would quickly see its liability multiply depending on whether it has a five-year or 15-year lease. Companies would appear more highly leveraged, which could affect factors such as corporate credit and existing debt covenants.
Crux of the matter
What makes commercial real estate industry professionals nervous is that it is not clear to what extent the new accounting guidelines would influence tenants’ decision-making process. Based on the universe of leased space, the potential impact is enormous.
Although FASB cites data that values leasing activity at $640 billion in 2008, other industry sources estimate that current volume as high as $1.3 trillion in operating leases for U.S. firms alone. Once the guidelines go into effect, which many in the industry believe will occur in 2013, both new and existing leases would be immediately affected.
One fear is that the new accounting practices could deter companies from signing long-term leases, or encourage firms to own rather than lease facilities. Both of those factors could be a detriment to the sale-leaseback and net-lease finance niche where leases typically extend 15 years and beyond.
Sale-leaseback transactions have accounted for $24.8 billion, or slightly more than 50%, of the $46.6 billion in single-tenant sales globally over the past 12 months from June 2009 through June 30, 2010, according to New York-based Real Capital Analytics.
Please visit www.nreionline.com for the complete article.
The lease accounting changes are expected to effect how companies view their real estate holdings and real estate asset management strategies in the future. Some analysts predict the changes will not be reflected on the balance sheets until 2013, but companies need to start the planning process now. Certainly there is need for a complete lease audit process to determine how many individual leases exist and how they could be impacted when they no longer are considered operating leases.
But important decisions will need to made on excess real estate space. In the past one option was subleasing the space to another tenant. Not a perfect solution but subleasing had some advantages. When the lease accounting rules change, subleasing will not remove the lease from the balance sheet and increases risk for the company in their new role as a landlord to the company that is subleasing space.
A better solution would be a Negotiated Lease Buy-Out or Lease Termination program. These are complicated transactions and you should employ someone with direct experience in corporate real estate finance and taxation. One company that has a long track record negotiating commercial real estate lease terminations is Cambridge Consulting Group. They have saved companies such as Bank Of America and Ford Motor Credit millions of dollars by reducing their lease obligations. For more information please visit their commercial lease termination website- www.commercialleaseterminations.com.
Tuesday, October 19, 2010
Value Energy Solutions Provides Energy Savings With Lighting Retrofits
Value Energy Solutions recently completed a parking garage lighting retrofit project for the Gables Midtown Apartments in Atlanta, GA. Value Energy Solutions is one of the largest lighting installation and lighting retrofit companies in the nation. For the past 30 years they have provided multifamily owners, developers and property managers with turnkey lighting solutions that exceed customer expectations and reduce lighting and energy costs. Gables Midtown is one of the newest apartment communities in the Morningside/ Ansley Park neighborhood of Atlanta and offers residents numerous amenities including Earthcraft and Energy Star certified apartments.
Gables Midtown management is proud of their focus on energy efficiency and water conservation features. When it was time to upgrade the energy efficiency of their parking garage lighting they contacted Value Energy Solutions. Value Energy Solutions thoroughly reviewed the existing parking garage lighting and the Gables Midtown energy saving goals. Originally, the parking deck lighting was the less energy efficient 175 watt Metal Halide Lights. Value Energy Solutions recommended retrofitting the parking deck with 2-Lamp 54wHO (high output) Vapor Tight Fluorescent lights. Gables Residential selected a 46,000 hour (extended life) rated lamp to maximize their energy savings and reduce lighting maintenance costs.
The projected energy savings for the lighting retrofit project is an impressive 47% and the cost of the lighting upgrade will pay for itself in only 17 months. Originally, Gables Midtown was considering using LED lights in the parking garage but Value Energy Solutions was able to offer a more cost efficient lighting retrofit program using new fluorescent lighting technology. Unlike many lighting companies that offer only one lighting product, Value Energy Solutions works with more than 250 lighting manufactures to provide their customers with the right solution at lower price point.
About Value Energy Solutions- Value Energy Solutions is one of the largest energy efficient lighting retrofitting companies in the United States. Realizing the need for building owners, property managers and facility engineers to find ways to conserve energy and cut their operating costs, Value Energy Solutions provides improved energy efficient lighting products as replacements for existing higher wattage fixtures. Value Energy Solutions was launched as a new venture by owners Dean Nations and Alan Carlquist as an expansion of their existing company, Value Lighting, Inc., a premier lighting wholesaler and distributor of lighting products.
The Value Energy Solutions lighting retrofit programs are offered for all commercial building types including Parking Garages, Warehouse/Industrial Buildings, Hotels, Retail Chains, Apartments and Office Buildings. For information on Value Energy Solutions please call Chris Owens, Director of Sales at 770.874.2191. Value Energy Solutions is located at 1110 Allgood Industrial Court, Marietta, GA 30066. To request more information please call or email at info@valueenergysolutions.com.
Thursday, October 7, 2010
Lease Accounting Rules Will Have Large Impact on Retailers
As reported in Retail Traffic
Proposed new lease accounting standards from the U.S. Financial Accounting Standards Board and the International Accounting Standards Board have the retail real estate world dizzy with worry as property owners and managers fear the new standards will cripple tenants and lead to shorter lease terms and more conservative expansion strategies.
Financial Accounting Standards 13 (FAS 13) would require all lease liabilities to be accounted for on corporate balance sheets as capital leases rather than as operating leases. That’s an important distinction because operating leases allow tenants to account for lease liabilities as they are incurred. In contrast, capital lease liabilities must be accounted for in their entirety every quarter.
In addition, the new standards would require corporations, including retailers, to account for the full potential liabilities of leases—including options and percentage rent, not just the base rental fee. They would have to provide estimates on all contingency-based payments built into the lease, including lease renewal options, rent based on a percentage of sales and co-tenancy kick-ins.
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com or call David Worrell at 888.472.5656
So, for example, a retailer would have to account for the entire potential 15 years’ worth of costs on a lease with a five-year term and two five-year options. As a result, retailers’ debt loads could appear to balloon up to ten times their current levels.
The Securities and Exchange Commission has estimated that more than $1 trillion in operating leases throughout the entire commercial real estate sector would need to be reclassified when FAS 13 goes into effect. As it stands, the two accounting boards plan to finalize the leasing standards no later than the second quarter of 2011.
The problem with this is that over the past few decades, retailers, more than any other type of commercial tenant, have become dependent on using various forms of contingency rents, says Vivian Mumaw, global director of lease administration with Jones Lang LaSalle Retail, an Atlanta-based third party property management provider.
The intricacies alone will make it difficult to comply with the rule. Retail leases today typically have five- to 10-year terms, with multiple renewal options. In addition, virtually all retailers pay a portion of their rents based on percentage of sales—meaning they pay more if sales exceed a certain threshold—while many also employ co-tenancy clauses, which trigger decreases in rental rates if other retailers move out of a shopping center.
All of that will make it difficult for retail chains to accurately estimate liabilities for the entire length of each lease, Mumaw says. In order to do so, they would have to forecast macroeconomic conditions, as well as the performance of their brand and the performance of each individual store many years into the future.
To read rest of article please visit :
http://retailtrafficmag.com/news/fas13_means_retail_real_estate_10052010/
Proposed new lease accounting standards from the U.S. Financial Accounting Standards Board and the International Accounting Standards Board have the retail real estate world dizzy with worry as property owners and managers fear the new standards will cripple tenants and lead to shorter lease terms and more conservative expansion strategies.
Financial Accounting Standards 13 (FAS 13) would require all lease liabilities to be accounted for on corporate balance sheets as capital leases rather than as operating leases. That’s an important distinction because operating leases allow tenants to account for lease liabilities as they are incurred. In contrast, capital lease liabilities must be accounted for in their entirety every quarter.
In addition, the new standards would require corporations, including retailers, to account for the full potential liabilities of leases—including options and percentage rent, not just the base rental fee. They would have to provide estimates on all contingency-based payments built into the lease, including lease renewal options, rent based on a percentage of sales and co-tenancy kick-ins.
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com or call David Worrell at 888.472.5656
So, for example, a retailer would have to account for the entire potential 15 years’ worth of costs on a lease with a five-year term and two five-year options. As a result, retailers’ debt loads could appear to balloon up to ten times their current levels.
The Securities and Exchange Commission has estimated that more than $1 trillion in operating leases throughout the entire commercial real estate sector would need to be reclassified when FAS 13 goes into effect. As it stands, the two accounting boards plan to finalize the leasing standards no later than the second quarter of 2011.
The problem with this is that over the past few decades, retailers, more than any other type of commercial tenant, have become dependent on using various forms of contingency rents, says Vivian Mumaw, global director of lease administration with Jones Lang LaSalle Retail, an Atlanta-based third party property management provider.
The intricacies alone will make it difficult to comply with the rule. Retail leases today typically have five- to 10-year terms, with multiple renewal options. In addition, virtually all retailers pay a portion of their rents based on percentage of sales—meaning they pay more if sales exceed a certain threshold—while many also employ co-tenancy clauses, which trigger decreases in rental rates if other retailers move out of a shopping center.
All of that will make it difficult for retail chains to accurately estimate liabilities for the entire length of each lease, Mumaw says. In order to do so, they would have to forecast macroeconomic conditions, as well as the performance of their brand and the performance of each individual store many years into the future.
To read rest of article please visit :
http://retailtrafficmag.com/news/fas13_means_retail_real_estate_10052010/
Tuesday, September 7, 2010
Tuesday, August 3, 2010
AOL Subleasing Space from Google
As reported on www.techcrunch.com
Google apparently has a lot of empty office space in Silicon Valley laying around under long term leases. One three story building – all 225,000 square feet of it – was just subleased by Google to AOL. AOL will be moving their Silicon Valley office, currently in Mountain View, to the new location at 395 Page Mill, Palo Alto, CA.
That’s just down the street from Stanford University, and just a block away from a new Chipotle. Apparently parking won’t be a problem either, based on the satellite image.AOL only needs a third of the space they’ve leased and are moving into the third floor. But instead of leasing a smaller building, they decided to take far more than they need and sublet to startups, Brad Garlinghouse tells me. Garlinghouse is the most senior AOL exec on the west coast.
SSE Labs, a Stanford affiliated organization that operates an incubator, has already signed up to move in. Other companies are moving in as well, says AOL, but they are looking for more startups. Interested? Email Trent Herren at trentherren@aol.com to get the details.
Why all the bother? Garlinghouse says he wants the energy of the startups to rub off on AOLers: “In addition to creating a new convenient space for our AOL employees – we’re all about fostering a culture around creativity and new ideas which is why we plan to sublease our space to entrepreneurs and start-ups in the valley.”
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com
Google apparently has a lot of empty office space in Silicon Valley laying around under long term leases. One three story building – all 225,000 square feet of it – was just subleased by Google to AOL. AOL will be moving their Silicon Valley office, currently in Mountain View, to the new location at 395 Page Mill, Palo Alto, CA.
That’s just down the street from Stanford University, and just a block away from a new Chipotle. Apparently parking won’t be a problem either, based on the satellite image.AOL only needs a third of the space they’ve leased and are moving into the third floor. But instead of leasing a smaller building, they decided to take far more than they need and sublet to startups, Brad Garlinghouse tells me. Garlinghouse is the most senior AOL exec on the west coast.
SSE Labs, a Stanford affiliated organization that operates an incubator, has already signed up to move in. Other companies are moving in as well, says AOL, but they are looking for more startups. Interested? Email Trent Herren at trentherren@aol.com to get the details.
Why all the bother? Garlinghouse says he wants the energy of the startups to rub off on AOLers: “In addition to creating a new convenient space for our AOL employees – we’re all about fostering a culture around creativity and new ideas which is why we plan to sublease our space to entrepreneurs and start-ups in the valley.”
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com
Friday, July 30, 2010
Pfizer Negotiates Lease Termination in Pennsylvania
MS Health Incorporated (IMS Health) has signed a lease totaling approximately 150,000 square feet at Highview I and Highview II at Providence Corporate Center in Collegeville, Pennsylvania.Highview I and II were developed by BPG in 2002 as a 100 percent build-to-suit lease agreement with Wyeth Pharmaceuticals, which now operates as Pfizer. In 2009, Pfizer chose to exercise its year end 2010 termination option for the lease at Highview II thereby making the space available for re-lease to IMS. Additionally, Pfizer chose to negotiate a termination of its lease at Highview I which ran through 2013 in order to vacate the space and accommodate the expanded transaction for IMS.
IMS Health is a provider of market intelligence to the pharmaceutical and healthcare industries, offering product and portfolio management capabilities; commercial effectiveness innovations; managed care and consumer health offerings; and consulting and services solutions that improve productivity and the delivery of quality healthcare worldwide.
The surrounding area has experienced population and business growth within the past ten years and offers access to highways and commercial centers. Currently, at the interchange, more than four million square feet of office and lab space is occupied by such leading companies as Pfizer, GlaxoSmithKline and Quest Diagnostics.
CFO Best Practice Sponsor:
Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com
Friday, July 16, 2010
Blue Cross Blue Shield May Reduce Real Estate to Save Costs
As reported in News Observer
By David Bracken
Blue Cross and Blue Shield of North Carolina's decision to review its real estate portfolio as it looks to slash expenses is part of a worrisome trend for the local real estate market. Like GlaxoSmithKline, Blue Cross is one of the larger and more stable employers in the Triangle, and one that wasn't expected to be a major contributor to the region's rising vacancy rate.
Blue Cross owns roughly 825,000 square feet of office space in Durham and Chapel Hill. The majority of that space is at the company's 40-acre campus along U.S. 15-501 in Chapel Hill and its customer service center and campus buildings on University Drive.The company also leases about 70,000 square feet in Durham's University Tower.
Although it's too early to tell how much of that space might become expendable, the results of a similar exercise undertaken by GSK are not reassuring.GSK is vacating six Triangle buildings it owns and also leaving nearly 90,000 square feet of leased office space in downtown Durham's American Tobacco complex.
The moves by GSK and Blue Cross are reminders of how the fragility of an economic recovery based largely on corporate cost-cutting is delaying improvement in the real estate market.
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com
Still in Survival Mode
"Every good business person knows that you can't save your way to prosperity," Highwoods Properties CEO Ed Fritsch said. "These are hopefully temporary measures until the economy gets back on its feet ... ."
The Triangle office vacancy rate was 18.3 percent in the first quarter, according to Karnes Research, a Raleigh firm that tracks commercial real estate trends. That's the highest it's been in more than a decade and nearly three percentage points higher than it was in the first quarter of 2009.
While there are local companies that are expanding to meet their own increased demand, iContact and Cree to name two, the majority of businesses continue to be in survival mode.Much of the activity in the market during the first half of the year involved companies searching for ways to reduce real estate expenses, said Rich Harris, managing director at Synergy Commercial Advisors in Durham.
"That's what a lot of brokers have been doing, sitting in meetings where the likelihood that you're going to achieve anything is pretty low but everybody needs to go through the process to see whether there's something that can be done," he said.
As large companies that own and lease space, Blue Cross and GSK are among those able to do something about their real estate costs.
Even the bigwigs haggle
Many large companies also negotiate termination clauses into their lease agreements that allow them to exit early for a fee. GSK, for example, took advantage of such a clause to leave its space in American Tobacco in May.
For others it's a matter of seeking relief from their landlord. One option is to try and reduce the rent by agreeing to a lease extension.When Highwoods considers such a request, it looks at the company's long-term prospects."We don't want to necessarily give relief now only for them not to be around to honor the lengthened commitment," Fritsch said. "You expect that most are and you do your homework."
Highwoods is also in a position to offer cash-strapped tenants other concessions, such as making improvements to a space in exchange for a longer commitment.The companies in the toughest position now are those that signed leases shortly before the economic downturn took hold and rents started falling. With too many years left on their leases, they aren't in a position to renegotiate. and can't take advantage of concessions being offered by landlords.
Harris said he sees signs there will be more serious tenants looking for space in the second half of the year. Venture capital is starting to flow again, and many companies looking have a year or less remaining on existing leases.
"The groups that we're seeing out there right now are more real," Harris said. "The probability that they're going to do a deal is higher."
david.bracken@newsobserver.com or 919-829-4548
Read more: http://www.newsobserver.com/2010/07/15/581990/vacancy-rate-may-grow-as-blue.html#ixzz0tqqlLE7d
By David Bracken
Blue Cross and Blue Shield of North Carolina's decision to review its real estate portfolio as it looks to slash expenses is part of a worrisome trend for the local real estate market. Like GlaxoSmithKline, Blue Cross is one of the larger and more stable employers in the Triangle, and one that wasn't expected to be a major contributor to the region's rising vacancy rate.
Blue Cross owns roughly 825,000 square feet of office space in Durham and Chapel Hill. The majority of that space is at the company's 40-acre campus along U.S. 15-501 in Chapel Hill and its customer service center and campus buildings on University Drive.The company also leases about 70,000 square feet in Durham's University Tower.
Although it's too early to tell how much of that space might become expendable, the results of a similar exercise undertaken by GSK are not reassuring.GSK is vacating six Triangle buildings it owns and also leaving nearly 90,000 square feet of leased office space in downtown Durham's American Tobacco complex.
The moves by GSK and Blue Cross are reminders of how the fragility of an economic recovery based largely on corporate cost-cutting is delaying improvement in the real estate market.
CFO Best Practice Sponsor: Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com
Still in Survival Mode
"Every good business person knows that you can't save your way to prosperity," Highwoods Properties CEO Ed Fritsch said. "These are hopefully temporary measures until the economy gets back on its feet ... ."
The Triangle office vacancy rate was 18.3 percent in the first quarter, according to Karnes Research, a Raleigh firm that tracks commercial real estate trends. That's the highest it's been in more than a decade and nearly three percentage points higher than it was in the first quarter of 2009.
While there are local companies that are expanding to meet their own increased demand, iContact and Cree to name two, the majority of businesses continue to be in survival mode.Much of the activity in the market during the first half of the year involved companies searching for ways to reduce real estate expenses, said Rich Harris, managing director at Synergy Commercial Advisors in Durham.
"That's what a lot of brokers have been doing, sitting in meetings where the likelihood that you're going to achieve anything is pretty low but everybody needs to go through the process to see whether there's something that can be done," he said.
As large companies that own and lease space, Blue Cross and GSK are among those able to do something about their real estate costs.
Even the bigwigs haggle
Many large companies also negotiate termination clauses into their lease agreements that allow them to exit early for a fee. GSK, for example, took advantage of such a clause to leave its space in American Tobacco in May.
For others it's a matter of seeking relief from their landlord. One option is to try and reduce the rent by agreeing to a lease extension.When Highwoods considers such a request, it looks at the company's long-term prospects."We don't want to necessarily give relief now only for them not to be around to honor the lengthened commitment," Fritsch said. "You expect that most are and you do your homework."
Highwoods is also in a position to offer cash-strapped tenants other concessions, such as making improvements to a space in exchange for a longer commitment.The companies in the toughest position now are those that signed leases shortly before the economic downturn took hold and rents started falling. With too many years left on their leases, they aren't in a position to renegotiate. and can't take advantage of concessions being offered by landlords.
Harris said he sees signs there will be more serious tenants looking for space in the second half of the year. Venture capital is starting to flow again, and many companies looking have a year or less remaining on existing leases.
"The groups that we're seeing out there right now are more real," Harris said. "The probability that they're going to do a deal is higher."
david.bracken@newsobserver.com or 919-829-4548
Read more: http://www.newsobserver.com/2010/07/15/581990/vacancy-rate-may-grow-as-blue.html#ixzz0tqqlLE7d
Tuesday, July 13, 2010
Green Leases Need to Reviewed Carefully
The topic of green leases and ways tenants and landlords can protect the financial interests associated with green building has been a big area of discussion over the last few years — and for good reason. As building owners continue to adopt green building practices both in newly constructed and existing buildings, they want to protect their investment and the value created by earning LEED green certification of their portfolio. On the flip side, many more tenants are looking to lease space in green buildings, are persuading landlords to seek LEED certification of existing buildings as part of the lease negotiation, and are building out tenant space as LEED for Commercial Interiors projects. To assist the industry in navigating this new market reality, the U.S. Green Building Council (USGBC) developed the “Green Office Guide: Integrating LEED Into Your Leasing Process,” a new resource to help tenants and landlords collaborate and provide specific tools and information that will help integrate green decision making throughout the leasing process.
There are now numerous examples of green leases ranging from full lease forms to specific sustainability riders. While these are important tools for the real estate industry, what the market lacked was a comprehensive resource that guided tenants, owners, brokers and attorneys through the process of integrating green thinking into the entire leasing process, not just into the lease terms. The leasing process constitutes much more than just the legally binding agreement. Building qualification and selection, leasing, landlord qualification and green tenant build-outs are complex processes, and while the lease terms frame key legal areas of the tenant-landlord relationship, decisions are made throughout the process that impact the success of the project’s green goals.
Building-Reflected_lg.jpg
Geared toward corporate tenants and their brokers, the “Green Office Guide” provides specific tools that help teams navigate the nuances of successful execution. Building owners, agency representatives and attorneys find value in understanding what prospective sustainability-focused tenants are looking for when selecting a prospective landlord or building. Among the topics covered in the guide include selecting the right team, qualifying and selecting buildings and landlords, lease negotiations and specific legal language, the tenant build-out, and the tenant’s ongoing operations and relationship with an existing landlord.
One of the challenges with green leases is that there is no “one size fits all” when it comes to negotiating a green lease. By educating practitioners on the process and the options, tenants and landlords can better collaborate to achieve a solution that works for both parties. The “Green Office Guide” tackles areas in which tenants and landlords may not be familiar, from background on LEED and green building, to the different steps of the leasing process, to how to actively build green thinking into standard practices. Other invaluable tools such as sample RFP language, site selection checklists, criteria for qualifying brokers and other project team professionals, and sample green lease provisions with extensive drafting notes are all covered.
This resource is the first in a suite of commercial integration guides by USGBC aimed to educate and be a companion resource to those interested in green building but are not immersed in the process on a daily basis. The “Green Operations Guide: Integrating LEED Into Your Property Management” will be released in August 2010 and will be an invaluable resource for those real estate professionals working towards the greening of existing buildings. Practical solutions for energy, water and waste reduction will be discussed and purchasers of the guide will receive access to editable electronic policy templates and tools that can aid in certification documentation. The “Green Retail Guide: Integrating LEED Into Your Leasing Process,” also available this summer, will focus on the nuances of a successful green leasing process with a specific focus on the retail marketplace.
With every sector now playing a vital role in the green building movement, understanding how sustainability can be incorporated and lucrative for all is a vital component of achieving green buildings for all within a generation.
Katie Rothenberg
Katie Rothenberg is manager of the commercial real estate sector at the U.S. Green Building Council.
There are now numerous examples of green leases ranging from full lease forms to specific sustainability riders. While these are important tools for the real estate industry, what the market lacked was a comprehensive resource that guided tenants, owners, brokers and attorneys through the process of integrating green thinking into the entire leasing process, not just into the lease terms. The leasing process constitutes much more than just the legally binding agreement. Building qualification and selection, leasing, landlord qualification and green tenant build-outs are complex processes, and while the lease terms frame key legal areas of the tenant-landlord relationship, decisions are made throughout the process that impact the success of the project’s green goals.
Building-Reflected_lg.jpg
Geared toward corporate tenants and their brokers, the “Green Office Guide” provides specific tools that help teams navigate the nuances of successful execution. Building owners, agency representatives and attorneys find value in understanding what prospective sustainability-focused tenants are looking for when selecting a prospective landlord or building. Among the topics covered in the guide include selecting the right team, qualifying and selecting buildings and landlords, lease negotiations and specific legal language, the tenant build-out, and the tenant’s ongoing operations and relationship with an existing landlord.
One of the challenges with green leases is that there is no “one size fits all” when it comes to negotiating a green lease. By educating practitioners on the process and the options, tenants and landlords can better collaborate to achieve a solution that works for both parties. The “Green Office Guide” tackles areas in which tenants and landlords may not be familiar, from background on LEED and green building, to the different steps of the leasing process, to how to actively build green thinking into standard practices. Other invaluable tools such as sample RFP language, site selection checklists, criteria for qualifying brokers and other project team professionals, and sample green lease provisions with extensive drafting notes are all covered.
This resource is the first in a suite of commercial integration guides by USGBC aimed to educate and be a companion resource to those interested in green building but are not immersed in the process on a daily basis. The “Green Operations Guide: Integrating LEED Into Your Property Management” will be released in August 2010 and will be an invaluable resource for those real estate professionals working towards the greening of existing buildings. Practical solutions for energy, water and waste reduction will be discussed and purchasers of the guide will receive access to editable electronic policy templates and tools that can aid in certification documentation. The “Green Retail Guide: Integrating LEED Into Your Leasing Process,” also available this summer, will focus on the nuances of a successful green leasing process with a specific focus on the retail marketplace.
With every sector now playing a vital role in the green building movement, understanding how sustainability can be incorporated and lucrative for all is a vital component of achieving green buildings for all within a generation.
Katie Rothenberg
Katie Rothenberg is manager of the commercial real estate sector at the U.S. Green Building Council.
Monday, July 12, 2010
Some banks have a special technique for dealing with business borrowers who can't repay loans coming due: Give them more time, hoping things improve and they can repay later.
Banks call it a wise strategy. Skeptics call it "extend and pretend."
View Full Image
Extend
Darryl James for The Wall Street Journal
A Portland, Ore., bank has extended the original 2007 loans taken out to purchase this lot. The planned residential community remains undeveloped.
Extend
Extend
Banks are applying it, in particular, to commercial real-estate lending, where, during the boom, optimistic borrowers got in over their heads to the tune of tens of billions of dollars.
A big push by banks in recent months to modify such loans—by stretching out maturities or allowing below-market interest rates—has slowed a spike in defaults. It also has helped preserve banks' capital, by keeping some dicey loans classified as "performing" and thus minimizing the amount of cash banks must set aside in reserves for future losses.
Restructurings of nonresidential loans stood at $23.9 billion at the end of the first quarter, more than three times the level a year earlier and seven times the level two years earlier. While not all were for commercial real estate, the total makes clear that large numbers of commercial-property borrowers got some leeway.
But the practice is creating uncertainties about the health of both the commercial-property market and some banks. The concern is that rampant modification of souring loans masks the true scope of the commercial property market weakness, as well as the damage ultimately in store for bank balance sheets.
In Atlanta, Georgian Bank lent $13.5 million to a company in late 2007, some of it to buy land for a 53-story luxury Mandarin Oriental hotel and condo development. The loan came due in November 2008, but the bank extended its maturity date by a year. The bank extended it again to May 2010, with an option for a further extension to November 2010, according to court documents.
Georgia's banking regulator shut down the bank last September. A subsequent U.S. regulatory review cited "lax" loan underwriting and "an aggressive growth strategy…that coincided with declining economic conditions in the Atlanta metropolitan area." Some of Georgian Bank's assets were assumed by First Citizens Bank and Trust Co. of Columbia, S.C., which began foreclosure proceedings on the still-unbuilt luxury development. The borrowers contested the move, and settlement talks are in progress.
[EXTEND_p1]
Also in Atlanta, Bank of America Corp. has extended a loan twice for a high-end shopping and residential project. Three years after a developer launched the Streets of Buckhead project as a European-style shopping district, all there is to show for it is a covey of silent cranes and a fence. The developer, Ben Carter, says he is in final negotiations for an investor to come in and inject $200 million into the languishing development.
Regulators helped spur banks' recent approach to commercial real estate by crafting new guidelines last October. They gave banks a variety of ways to restructure loans. And they allowed banks to record loans still operating under the original terms as "performing" even if the value of the underlying property had fallen below the loan amount—which is an ominous sign for ultimate repayment. Although regulators say banks shouldn't take the guidelines as a signal to cut borrowers more slack, it appears some did.
Banks hold some $176 billion of souring commercial-real-estate loans, according to an estimate by research firm Foresight Analytics. About two-thirds of bank commercial real-estate loans maturing between now and 2014 are underwater, meaning the property is worth less than the loan on it, Foresight data show. U.S. commercial-real-estate values remain 42% below their October 2007 peak and only slightly above the low they hit in October 2009, according to Moody's Investors Service.
In the first quarter, 9.1% of commercial-property loans held by banks were delinquent, compared with 7% a year earlier and just 1.5% in the first quarter of 2007, according to Foresight.
Holding off on foreclosing is often good business, says Mark Tenhundfeld, senior vice president at the American Bankers Association. "It can be better for a bank to extend a loan and increase the chance that the bank will be repaid in full rather than call the loan due now and dump more property on an already-depressed market," he says.
But continuing to extend loans and otherwise modify them, rather than foreclosing, amounts to a bet that the economy will rebound enough to enable clients to find new demand for the plethora of offices, hotels, condos and other property on which they borrowed. If it doesn't work out this way, the banks will end up having to write off the loans anyway.
At that point, if they haven't been setting aside sufficient cash all along for potential losses on such loans, the banks will face a hit to their earnings.
Banks' reluctance to bite the bullet on some deteriorating commercial real estate can have economic repercussions. The readiness to stretch out loans puts a floor under commercial real estate and keeps it from hitting bottom, which may be a precondition for a robust revival.
[EXTEND_jmp]
More broadly, the failure to get the loans off banks' books tends to deter new lending to others. It's a pattern somewhat reminiscent, although on a lesser scale, of the way Japanese banks' failure to write off souring loans in the 1990s contributed to years of stagnation.
It's a Catch-22 for banks. As long as some of their capital is tied up in real-estate loans that are struggling—and as the banks see a pipeline of still-more sour real-estate debt that will mature soon—their lending is likely to remain constricted. But to wipe the slate clean by writing off many more loans would mean an even bigger hit to their capital.
"It does not take much of a write-down to wipe out capital," says Christopher Marinac, managing principal at FIG Partners LLC, a bank research and investment firm.
Federal bank regulators tackled the issues in October with a 33-page set of guidelines. Bank regulators have said they were concerned about commercial-property losses and debts coming due on commercial property.
Another problem they sought to resolve was that banks and their examiners weren't always on the same page. In some cases banks weren't recognizing loan problems, while in other cases, tough bank examiners were forcing banks to downgrade loans the bankers believed were still good.
The guidance was intended "to promote both prudent commercial real-estate loan workouts by banks and balanced and consistent reviews of these loans by the supervisory agencies," said Elizabeth Duke, a Federal Reserve governor, in a March speech. The guidelines came from the Federal Financial Institutions Examination Council, which includes the Fed, the Federal Deposit Insurance Corp. and the Comptroller of the Currency.
Although one goal was greater consistency in the treatment of commercial real-estate loans, in practice, the guidelines appear to have fed confusion in the markets about how banks are dealing with commercial real-estate debt. "I just don't believe that the standard is being applied consistently across the industry," says Edward Wehmer, chief executive of Wintrust Financial Corp. in Lake Forest, Ill.
In a May conference call with 1,400 bank executives, regulators sought to clear up confusion. "We don't want banks to pretend and extend," Sabeth Siddique, Federal Reserve assistant director of credit risk, said on the call. "We did hear from investors and some bankers interpreting this guidance as a form of forbearance, and let me assure you it's not."
Restructurings increased at some banks, like BB&T Corp. of Winston-Salem, N.C. Its total of one type of restructured commercial loan hit $969 million in recent months, the bank reported in April. That was a huge jump from six months earlier, when the figure was just $68 million.
The increase was "basically a function of implementing the new regulatory guidance," the bank's finance chief, Daryl Bible, told investors in May. "We are working with our customers trying to keep them in the loans."
BB&T's report showed a significant number of cases where it was extending loan maturities and allowing interest rates not widely available in the market for loans of similar risk.
Banks don't have to disclose how terms on their loans have changed, making it hard to know whether they are setting aside enough cash for possible losses.
In a large proportion of cases, modifying the terms of loans ultimately isn't enough to save them. At the end of the first quarter, 44.5% of debt restructurings were 30 days or more delinquent or weren't accruing interest, up from 28% the first quarter of 2008.
A case in Portland, Ore., shows how banks can keep treating a commercial loan as current, despite the difficulties of the underlying project.
A client called Touchmark Living Centers Inc. in 2007 borrowed $15.9 million, in two loans, to buy land for a development. The borrower planned to retire the loans at the end of the year by obtaining construction financing to build the Touchmark Heights community for empty-nesters.
Because the raw land produced no income, the lender, Umpqua Bank, had provided "interest reserves" with which the developer could cover interest payments while obtaining permits and preparing to build. The bank extended Touchmark a $350,000 interest reserve—in effect increasing what Touchmark owed by that amount.
In December 2007, the U.S. economy slipped into recession. When the loans came due that month, Touchmark didn't pay them off. Umpqua extended the maturity to May 31, 2008.
The bank also added $600,000 to the interest reserves. Though supplying interest reserves is common at the outset of a loan, when an unbuilt project can't produce any income with which to pay debt service, replenishing interest reserves is frowned on by regulators.
Asked to comment, a spokeswoman for the bank said, "Umpqua and Touchmark had determined that the project was still viable but not yet ready for development." Touchmark said it didn't pursue construction financing at that time because "it was not prudent to proceed with developing the property until the economy improves," as a spokeswoman put it.
In 2008 the bank extended the loans again, to April 2009. During this time, Touchmark began paying interest on the loans out of its own pocket.
Then in May 2009, Umpqua restructured the loans, lumping what was owed into one $15 million loan that required regular payments on both interest and principal. Touchmark paid down the principal a little and Umpqua set a new maturity date—May 5, 2012.
Banks call it a wise strategy. Skeptics call it "extend and pretend."
View Full Image
Extend
Darryl James for The Wall Street Journal
A Portland, Ore., bank has extended the original 2007 loans taken out to purchase this lot. The planned residential community remains undeveloped.
Extend
Extend
Banks are applying it, in particular, to commercial real-estate lending, where, during the boom, optimistic borrowers got in over their heads to the tune of tens of billions of dollars.
A big push by banks in recent months to modify such loans—by stretching out maturities or allowing below-market interest rates—has slowed a spike in defaults. It also has helped preserve banks' capital, by keeping some dicey loans classified as "performing" and thus minimizing the amount of cash banks must set aside in reserves for future losses.
Restructurings of nonresidential loans stood at $23.9 billion at the end of the first quarter, more than three times the level a year earlier and seven times the level two years earlier. While not all were for commercial real estate, the total makes clear that large numbers of commercial-property borrowers got some leeway.
But the practice is creating uncertainties about the health of both the commercial-property market and some banks. The concern is that rampant modification of souring loans masks the true scope of the commercial property market weakness, as well as the damage ultimately in store for bank balance sheets.
In Atlanta, Georgian Bank lent $13.5 million to a company in late 2007, some of it to buy land for a 53-story luxury Mandarin Oriental hotel and condo development. The loan came due in November 2008, but the bank extended its maturity date by a year. The bank extended it again to May 2010, with an option for a further extension to November 2010, according to court documents.
Georgia's banking regulator shut down the bank last September. A subsequent U.S. regulatory review cited "lax" loan underwriting and "an aggressive growth strategy…that coincided with declining economic conditions in the Atlanta metropolitan area." Some of Georgian Bank's assets were assumed by First Citizens Bank and Trust Co. of Columbia, S.C., which began foreclosure proceedings on the still-unbuilt luxury development. The borrowers contested the move, and settlement talks are in progress.
[EXTEND_p1]
Also in Atlanta, Bank of America Corp. has extended a loan twice for a high-end shopping and residential project. Three years after a developer launched the Streets of Buckhead project as a European-style shopping district, all there is to show for it is a covey of silent cranes and a fence. The developer, Ben Carter, says he is in final negotiations for an investor to come in and inject $200 million into the languishing development.
Regulators helped spur banks' recent approach to commercial real estate by crafting new guidelines last October. They gave banks a variety of ways to restructure loans. And they allowed banks to record loans still operating under the original terms as "performing" even if the value of the underlying property had fallen below the loan amount—which is an ominous sign for ultimate repayment. Although regulators say banks shouldn't take the guidelines as a signal to cut borrowers more slack, it appears some did.
Banks hold some $176 billion of souring commercial-real-estate loans, according to an estimate by research firm Foresight Analytics. About two-thirds of bank commercial real-estate loans maturing between now and 2014 are underwater, meaning the property is worth less than the loan on it, Foresight data show. U.S. commercial-real-estate values remain 42% below their October 2007 peak and only slightly above the low they hit in October 2009, according to Moody's Investors Service.
In the first quarter, 9.1% of commercial-property loans held by banks were delinquent, compared with 7% a year earlier and just 1.5% in the first quarter of 2007, according to Foresight.
Holding off on foreclosing is often good business, says Mark Tenhundfeld, senior vice president at the American Bankers Association. "It can be better for a bank to extend a loan and increase the chance that the bank will be repaid in full rather than call the loan due now and dump more property on an already-depressed market," he says.
But continuing to extend loans and otherwise modify them, rather than foreclosing, amounts to a bet that the economy will rebound enough to enable clients to find new demand for the plethora of offices, hotels, condos and other property on which they borrowed. If it doesn't work out this way, the banks will end up having to write off the loans anyway.
At that point, if they haven't been setting aside sufficient cash all along for potential losses on such loans, the banks will face a hit to their earnings.
Banks' reluctance to bite the bullet on some deteriorating commercial real estate can have economic repercussions. The readiness to stretch out loans puts a floor under commercial real estate and keeps it from hitting bottom, which may be a precondition for a robust revival.
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More broadly, the failure to get the loans off banks' books tends to deter new lending to others. It's a pattern somewhat reminiscent, although on a lesser scale, of the way Japanese banks' failure to write off souring loans in the 1990s contributed to years of stagnation.
It's a Catch-22 for banks. As long as some of their capital is tied up in real-estate loans that are struggling—and as the banks see a pipeline of still-more sour real-estate debt that will mature soon—their lending is likely to remain constricted. But to wipe the slate clean by writing off many more loans would mean an even bigger hit to their capital.
"It does not take much of a write-down to wipe out capital," says Christopher Marinac, managing principal at FIG Partners LLC, a bank research and investment firm.
Federal bank regulators tackled the issues in October with a 33-page set of guidelines. Bank regulators have said they were concerned about commercial-property losses and debts coming due on commercial property.
Another problem they sought to resolve was that banks and their examiners weren't always on the same page. In some cases banks weren't recognizing loan problems, while in other cases, tough bank examiners were forcing banks to downgrade loans the bankers believed were still good.
The guidance was intended "to promote both prudent commercial real-estate loan workouts by banks and balanced and consistent reviews of these loans by the supervisory agencies," said Elizabeth Duke, a Federal Reserve governor, in a March speech. The guidelines came from the Federal Financial Institutions Examination Council, which includes the Fed, the Federal Deposit Insurance Corp. and the Comptroller of the Currency.
Although one goal was greater consistency in the treatment of commercial real-estate loans, in practice, the guidelines appear to have fed confusion in the markets about how banks are dealing with commercial real-estate debt. "I just don't believe that the standard is being applied consistently across the industry," says Edward Wehmer, chief executive of Wintrust Financial Corp. in Lake Forest, Ill.
In a May conference call with 1,400 bank executives, regulators sought to clear up confusion. "We don't want banks to pretend and extend," Sabeth Siddique, Federal Reserve assistant director of credit risk, said on the call. "We did hear from investors and some bankers interpreting this guidance as a form of forbearance, and let me assure you it's not."
Restructurings increased at some banks, like BB&T Corp. of Winston-Salem, N.C. Its total of one type of restructured commercial loan hit $969 million in recent months, the bank reported in April. That was a huge jump from six months earlier, when the figure was just $68 million.
The increase was "basically a function of implementing the new regulatory guidance," the bank's finance chief, Daryl Bible, told investors in May. "We are working with our customers trying to keep them in the loans."
BB&T's report showed a significant number of cases where it was extending loan maturities and allowing interest rates not widely available in the market for loans of similar risk.
Banks don't have to disclose how terms on their loans have changed, making it hard to know whether they are setting aside enough cash for possible losses.
In a large proportion of cases, modifying the terms of loans ultimately isn't enough to save them. At the end of the first quarter, 44.5% of debt restructurings were 30 days or more delinquent or weren't accruing interest, up from 28% the first quarter of 2008.
A case in Portland, Ore., shows how banks can keep treating a commercial loan as current, despite the difficulties of the underlying project.
A client called Touchmark Living Centers Inc. in 2007 borrowed $15.9 million, in two loans, to buy land for a development. The borrower planned to retire the loans at the end of the year by obtaining construction financing to build the Touchmark Heights community for empty-nesters.
Because the raw land produced no income, the lender, Umpqua Bank, had provided "interest reserves" with which the developer could cover interest payments while obtaining permits and preparing to build. The bank extended Touchmark a $350,000 interest reserve—in effect increasing what Touchmark owed by that amount.
In December 2007, the U.S. economy slipped into recession. When the loans came due that month, Touchmark didn't pay them off. Umpqua extended the maturity to May 31, 2008.
The bank also added $600,000 to the interest reserves. Though supplying interest reserves is common at the outset of a loan, when an unbuilt project can't produce any income with which to pay debt service, replenishing interest reserves is frowned on by regulators.
Asked to comment, a spokeswoman for the bank said, "Umpqua and Touchmark had determined that the project was still viable but not yet ready for development." Touchmark said it didn't pursue construction financing at that time because "it was not prudent to proceed with developing the property until the economy improves," as a spokeswoman put it.
In 2008 the bank extended the loans again, to April 2009. During this time, Touchmark began paying interest on the loans out of its own pocket.
Then in May 2009, Umpqua restructured the loans, lumping what was owed into one $15 million loan that required regular payments on both interest and principal. Touchmark paid down the principal a little and Umpqua set a new maturity date—May 5, 2012.
Accounting
With many of today’s companies struggling to weather the storm in a difficult economy, the C-Suite is looking to cut operational expenses and trying to adopt a social responsibility strategy recognizing “green has become the new black.”
Realizing real estate comprises one of the top two or three largest impacts on their financial performance, the three important questions senior management are asking their corporate real estate/facilities executives are:
1. “What is our total cost of occupancy?”
2. “How can we reduce it?”
3. “How can our real estate assets serve our organization’s operational needs and contribute to our company’s desire to achieve environmental stewardship?”
Tough questions? Maybe, if the CRE professional doesn’t have access to the information needed to identify areas where costs can be cut. The first challenge in the equation is determining the cost categories that make up the “total cost of occupancy.”
A great place to start is by taking a look at the International Total Occupancy Cost Code developed by London-based IPD Occupiers. The code includes over 250 categories organized in the five super categories of:
1. Property Occupation (Rent, taxes, acquisition, debt service)
2. Adaptation and Equipment (Fit out, improvements, capital investment)
3. Building Operation (Energy/utilities, maintenance, repair, moves, churn, security, cleaning)
4. Business Support (Reception, catering, mail room)
5. Management (Fees for real estate, facilities and project management)
The next challenge is to determine where, within the enterprise, the information resides and be able to summarize and standardize the information across the portfolio of leased and owned properties. Once achieved, (no small feat given the resources available to the CRE professional and silos of information that exist in many organizations) the information is collected, analyzed, and prioritized a benchmark can be developed and the “bigger buckets” targeted for the greatest degree of cost savings.
The information then becomes actionable business intelligence that can be used as a foundation of a strategy.
In typical organizations, the top ten cost items for a leased facility are:
1. Net Rent
2. Rates (local property taxes)
3. Total utilities (energy + water)
4. Total repair & maintenance
5. Total property management
6. Total cleaning
7. Internal & external distribution
8. Service charges
9. Security
10. Catering & vending
“Think, Build, Operate”
With the total occupancy costs calculated and a cost benchmark established, the CRE professional can now answer senior management’s question #1.
To answer the subsequent questions, the CRE department will need to put together a strategic plan. Through facilitated sessions with internal constituents and outside consultants the process will help to develop a plan that will get the organization to “crawl, walk and then run.”
Along with a consultant CRE departments will co-develop a strategic and tactical solution unique to the organization might utilize a process driven approach that will challenge the internal team to:
THINK: What is the real estate portfolio’s current and desired future state?
BUILD: What are the specific initiatives to be implemented across the real estate/facilities department(s) and portfolio that bring about the desired efficiency, economic and environmental sustainability results?
OPERATE: How/who will implement the plan, what will become the KPIs to measure progress and define success, and how will the momentum be maintained until the desired future state is reached?
Departmental and Portfolio Efficiency
At a departmental level, in order to effectively bring about change, the CRE professional needs to be realistic about ‘where they are’ (current state) and where the enterprise ‘wants to be’ (future state). Is it simply to reduce operating costs, rationalize your portfolio, dispose of non-core assets or something much more?
A key component to determining whether the organization will be heading in the right direction is to articulate the KPIs they will use to assess the portfolio and processes and help them manage change. These KPIs become the “gauges on the dashboard” and determine how to measure success and whether they are driving costs out of the portfolio.
But, before addressing the overall portfolio of leased and owned facilities the CRE professional will be well served to look in the mirror and examine the internal business processes, departmental core competencies and the role outside service providers play. Getting the management piece addressed is the fundamental component can be streamlined and improved to set the efficiency train in motion.
At this stage it’s best to incorporate a plan of how to orchestrate the ”people” (who will implement and affect the desire results?); the “process” (what are the workflows that will be refined or developed that will become the framework for making and managing change?); and the “technology” (how will the use of technologies help the organization measure, manage, automate, and report on portfolio/building information about occupancy costs that will support strategic decision making?).
Tackling the low and high hanging fruit of the economics of the portfolio
The next piece of the puzzle is to identify and implement the specific initiatives that begin to carve out costs. The most efficient building in the portfolio is the one you no longer use because you’ve disposed it. While every organization is unique some common threads of initiatives to cut costs could be:
* Deploying alternative workplace strategies
* Addressing operational efficiency of your owned facilities
* Reducing energy consumption
* Evaluating and executing leasing strategies into commercial properties that can contribute to your company’s sustainability goals
* Decreasing the utilization of expensive facilities with space management designed to show vacant and under performing facilities
* Developing the visibility into your under performing facilities
* Rationalizing your portfolio and consolidating staff/facilities to dispose of non-core assets
By effectively managing the size and cost of the portfolio, real estate executives can have a dramatic impact to their organizations’ bottom-line and profitability while contributing to corporate social responsibility (CSR) initiatives important to many companies today.
The ‘holy grail’ – achieving environmental sustainability
In today’s new economy the challenge has become how to maintain profitability while moving your organization toward environmental stewardship.
While the debate about whether climate change is truly caused by the emission of greenhouse gases continues, it is clear that adopting environmental sustainability initiatives can contribute to the positive financial performance of the company.
Some of these practices that involve operational efficiency include:
* ‘Green’ and LEED certified design practices
* ‘Smart’ building systems
* Energy demand/consumption
* Use of renewable energy sources
It makes good business sense to adopt these enviro-friendly principles because it reduces costs and moves the organization toward societal responsibility of the environment. While “green has become the new black” it no longer means it creates “red ink.”
In developing a sustainability strategy plan the blue print starts with determining the overall sustainability goals of the organization and identify initiatives are already in place to address sustainability.
A contributing factor to company’s CSR strategy is for the CRE professional to bring the real estate perspective by:
* Evaluating the financial and environmental impact of capital investment decisions focused on resource consumption and carbon efficiency
* Outsourcing non-core services to ‘green, cleantech’ providers
* Streamlining and ’greening’ departmental workflows
* Automating corrective and preventive maintenance schedules and alerts to maintain facilities at peak resource and energy efficiency
* Establishing carbon disclosure reports and creating sustainability scorecards
* Exploring the feasibility and benefits of alternative and renewable energy sources (solar, wind, geothermal, hydroelectric, Co-generation, etc.)
By achieving greater efficiency of business workflows and facility operations, carving out occupancy costs and implementing environmental sustainability measures not only makes good business sense but, it’s the right thing to do for the environment.
Back in the day ‘tree hugging, do gooders’ were pushing for recycling, turning off the lights, adjusting the office thermostat and copying on both sides of paper. Being good to the environment seemed like an expensive nuisance. Now? It makes fantastic business sense due in large part to the fact that, “you don’t pay for what you don’t use.”
What do you think? What are your ideas of how you could implement cost avoidance initiatives that support an overall real estate strategy and help you don’t pay for what you don’t use?
http://cre3.wordpress.com/
Realizing real estate comprises one of the top two or three largest impacts on their financial performance, the three important questions senior management are asking their corporate real estate/facilities executives are:
1. “What is our total cost of occupancy?”
2. “How can we reduce it?”
3. “How can our real estate assets serve our organization’s operational needs and contribute to our company’s desire to achieve environmental stewardship?”
Tough questions? Maybe, if the CRE professional doesn’t have access to the information needed to identify areas where costs can be cut. The first challenge in the equation is determining the cost categories that make up the “total cost of occupancy.”
A great place to start is by taking a look at the International Total Occupancy Cost Code developed by London-based IPD Occupiers. The code includes over 250 categories organized in the five super categories of:
1. Property Occupation (Rent, taxes, acquisition, debt service)
2. Adaptation and Equipment (Fit out, improvements, capital investment)
3. Building Operation (Energy/utilities, maintenance, repair, moves, churn, security, cleaning)
4. Business Support (Reception, catering, mail room)
5. Management (Fees for real estate, facilities and project management)
The next challenge is to determine where, within the enterprise, the information resides and be able to summarize and standardize the information across the portfolio of leased and owned properties. Once achieved, (no small feat given the resources available to the CRE professional and silos of information that exist in many organizations) the information is collected, analyzed, and prioritized a benchmark can be developed and the “bigger buckets” targeted for the greatest degree of cost savings.
The information then becomes actionable business intelligence that can be used as a foundation of a strategy.
In typical organizations, the top ten cost items for a leased facility are:
1. Net Rent
2. Rates (local property taxes)
3. Total utilities (energy + water)
4. Total repair & maintenance
5. Total property management
6. Total cleaning
7. Internal & external distribution
8. Service charges
9. Security
10. Catering & vending
“Think, Build, Operate”
With the total occupancy costs calculated and a cost benchmark established, the CRE professional can now answer senior management’s question #1.
To answer the subsequent questions, the CRE department will need to put together a strategic plan. Through facilitated sessions with internal constituents and outside consultants the process will help to develop a plan that will get the organization to “crawl, walk and then run.”
Along with a consultant CRE departments will co-develop a strategic and tactical solution unique to the organization might utilize a process driven approach that will challenge the internal team to:
THINK: What is the real estate portfolio’s current and desired future state?
BUILD: What are the specific initiatives to be implemented across the real estate/facilities department(s) and portfolio that bring about the desired efficiency, economic and environmental sustainability results?
OPERATE: How/who will implement the plan, what will become the KPIs to measure progress and define success, and how will the momentum be maintained until the desired future state is reached?
Departmental and Portfolio Efficiency
At a departmental level, in order to effectively bring about change, the CRE professional needs to be realistic about ‘where they are’ (current state) and where the enterprise ‘wants to be’ (future state). Is it simply to reduce operating costs, rationalize your portfolio, dispose of non-core assets or something much more?
A key component to determining whether the organization will be heading in the right direction is to articulate the KPIs they will use to assess the portfolio and processes and help them manage change. These KPIs become the “gauges on the dashboard” and determine how to measure success and whether they are driving costs out of the portfolio.
But, before addressing the overall portfolio of leased and owned facilities the CRE professional will be well served to look in the mirror and examine the internal business processes, departmental core competencies and the role outside service providers play. Getting the management piece addressed is the fundamental component can be streamlined and improved to set the efficiency train in motion.
At this stage it’s best to incorporate a plan of how to orchestrate the ”people” (who will implement and affect the desire results?); the “process” (what are the workflows that will be refined or developed that will become the framework for making and managing change?); and the “technology” (how will the use of technologies help the organization measure, manage, automate, and report on portfolio/building information about occupancy costs that will support strategic decision making?).
Tackling the low and high hanging fruit of the economics of the portfolio
The next piece of the puzzle is to identify and implement the specific initiatives that begin to carve out costs. The most efficient building in the portfolio is the one you no longer use because you’ve disposed it. While every organization is unique some common threads of initiatives to cut costs could be:
* Deploying alternative workplace strategies
* Addressing operational efficiency of your owned facilities
* Reducing energy consumption
* Evaluating and executing leasing strategies into commercial properties that can contribute to your company’s sustainability goals
* Decreasing the utilization of expensive facilities with space management designed to show vacant and under performing facilities
* Developing the visibility into your under performing facilities
* Rationalizing your portfolio and consolidating staff/facilities to dispose of non-core assets
By effectively managing the size and cost of the portfolio, real estate executives can have a dramatic impact to their organizations’ bottom-line and profitability while contributing to corporate social responsibility (CSR) initiatives important to many companies today.
The ‘holy grail’ – achieving environmental sustainability
In today’s new economy the challenge has become how to maintain profitability while moving your organization toward environmental stewardship.
While the debate about whether climate change is truly caused by the emission of greenhouse gases continues, it is clear that adopting environmental sustainability initiatives can contribute to the positive financial performance of the company.
Some of these practices that involve operational efficiency include:
* ‘Green’ and LEED certified design practices
* ‘Smart’ building systems
* Energy demand/consumption
* Use of renewable energy sources
It makes good business sense to adopt these enviro-friendly principles because it reduces costs and moves the organization toward societal responsibility of the environment. While “green has become the new black” it no longer means it creates “red ink.”
In developing a sustainability strategy plan the blue print starts with determining the overall sustainability goals of the organization and identify initiatives are already in place to address sustainability.
A contributing factor to company’s CSR strategy is for the CRE professional to bring the real estate perspective by:
* Evaluating the financial and environmental impact of capital investment decisions focused on resource consumption and carbon efficiency
* Outsourcing non-core services to ‘green, cleantech’ providers
* Streamlining and ’greening’ departmental workflows
* Automating corrective and preventive maintenance schedules and alerts to maintain facilities at peak resource and energy efficiency
* Establishing carbon disclosure reports and creating sustainability scorecards
* Exploring the feasibility and benefits of alternative and renewable energy sources (solar, wind, geothermal, hydroelectric, Co-generation, etc.)
By achieving greater efficiency of business workflows and facility operations, carving out occupancy costs and implementing environmental sustainability measures not only makes good business sense but, it’s the right thing to do for the environment.
Back in the day ‘tree hugging, do gooders’ were pushing for recycling, turning off the lights, adjusting the office thermostat and copying on both sides of paper. Being good to the environment seemed like an expensive nuisance. Now? It makes fantastic business sense due in large part to the fact that, “you don’t pay for what you don’t use.”
What do you think? What are your ideas of how you could implement cost avoidance initiatives that support an overall real estate strategy and help you don’t pay for what you don’t use?
http://cre3.wordpress.com/
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