Engage a global work force

Most CEOs instinctively know that
engaged employees are more productive, but now there’s new data supporting their positive influence on the
bottom line.

Watson Wyatt’s 2007-2008 Global Work
Attitudes Report measures the impact of
employee attitudes on their company’s
financial performance over a five-year
period. Not surprisingly, the companies
that focused on driving employee engagement had the highest employee productivity and 20 percent higher financial returns
than lower-performing companies in the
survey. The surprise was that the drivers
of employee engagement differ by performance segments, not geographic location, so CEOs should customize their messages accordingly to achieve maximum
impact.

“Employees who know what to do and
who are motivated to do it are truly
engaged,” says Ilene Gochman, Ph.D.,
National Practice Director of Organization Effectiveness at Watson Wyatt
Worldwide. “To win the heads and the
hearts of their employees, CEOs must
communicate the company’s direction
and how each employee contributes to
the outcome. Tailoring those messages to
specific groups of employees based upon
their performance, not their location, is
the most effective method for driving
engagement.”

Smart Business spoke with Gochman
about how CEOs can effectively drive
employee engagement across a global
work force.

What are the universal drivers of employee
engagement?

Our research shows that CEOs should
focus on engaging employees, not driving
productivity, because increased productivity is a byproduct of employee engagement. Based upon our survey of thousands
of employees in mid-sized organizations,
employees all around the globe are motivated by the same things and there’s room
for improvement in every area. Here are
the universal engagement drivers and
some tips for maximizing each one.

 

  • Communication More is better. Even if CEOs aren’t sure
    what to say, communicate frequently because our research shows that employees
    will understand if you don’t have all the
    answers.

     

     

  • Strategic direction and leadership Engaged employees trust their senior
    leaders, and they have confidence in their
    ability to lead. When CEOs don’t explain
    their reasons for decisions or how they’re
    handling a problem, they give employees
    the misimpression they aren’t doing anything; so give employees straight answers.

     

     

  • Customer focus Organizations with strong customer
    focus make customer satisfaction a top priority and their employees know how they
    impact customers.

     

     

  • Compensation and benefits Link pay to performance and ensure satisfaction with benefits to drive engagement.

     

Employees in all regions give their companies low marks in compensation and
benefits and communication. While they
give consistently high marks on customer
focus, reviews of strategic direction and
leadership were mixed.

Why are customized engagement messages
more effective?

One size fits all is not best for crafting or
delivering engagement communication
because employees want to be recognized
as individuals. The more employees feel
like you are speaking directly to them, the
more effective your message will be.
Customized communication creates employee commitment and line of sight
between the company’s mission and each
employee’s individual contribution. Conduct attitude surveys among your employees to determine their unique drivers of
engagement.

What’s the best way to segment employees?

Employees are not all the same in terms
of their value to the company. Separate
your employees into these five segments
and then tailor your communication as
suggested:

 

  • Value creators High performers contribute to the organization’s success. Target messages toward
    maintaining their motivation and retaining
    them, such as giving them information
    about career opportunities.

     

     

  • Core contributors Solid, consistent performers are typically
    the largest employee segment. Communication should center on motivating them to
    become value creators.

     

     

  • Aligned skeptics Medium to high line of sight but low commitment. Focus on programs to build trust
    and promote commitment.

     

     

  • Lost believers Low line of sight but high commitment.
    Give these employees direction.

     

     

  • Disengaged Evaluate continued investments.

 

ILENE GOCHMAN, Ph.D., is the National Practice Director of Organization Effectiveness at Watson Wyatt Worldwide. Reach her at
(312) 525-2105 or [email protected].

Conversion pieces

Almost every executive is or has been
impacted by today’s economy and real
estate market. But, many developers are finding relief by converting existing commercial properties to condominiums.

When a property changes from sole ownership to individual unit ownership, developers
can reduce risk by securing commitments
from unit buyers before even acquiring the
title to the property, which appeals to purchase money lenders, and there may be little
cash required to finalize the transaction.

“By converting to condos, developers turn
otherwise un-noteworthy rental assets into
property that becomes attainable for would-be buyers,” says Jonathan H. Lehman, legal
counsel for Prudential CRES Commercial
Real Estate SFL. “The event of converting is
especially appealing when a buyer is
involved in the condo creation.”

Smart Business spoke with Lehman about
the bilateral benefits of condo conversions.

How do conversions benefit developers?

When developers secure condo unit buyers
and acquire a property simultaneously with
the condo conversion and sale of units,
there’s minimized risk of unoccupied real
estate sitting on the market for a long time.
Developers can assure lenders and secure
financing accordingly. A properly executed
simultaneous conversion produces equity
from the sale side for immediate application
toward the acquisition side, as opposed to
new construction, where developers face a
major capitalization requirement. These conversions require only the difference of cash-to-close minus condo sale proceeds, if such a
differential exists. Developers stand to walk
away with a substantial profit and they could
be in and out of the transaction relatively
quickly. With residential condo construction,
buyers are asked to buy on speculation and
developers could be tied to a project for
years. Also, non-residential conversions face
little or no governmental review.

What are the benefits for unit owners?

Individual unit owners who have leverage
by way of tactful contract negotiations can
insist on being involved in the initial set-up of
the association and the drafting of the governing documents, which isn’t on the table
when buying in an existing condominium.
Owners get more control and input opportunities, from voting power and assessments to
rules, regulations and signage. When units
are pre-sold prior to conversion, owners
reduce the risks associated with purchasing
a unit in an undersold project subject to
developer solvency. Those currently leasing
space have the opportunity to switch rental
expenses to real estate investments, which
could pay off well once the market rebounds.

What are the steps for converting?

A developer involved in a pre-sold commercial condominium conversion must:

  • Assemble professionals. A conversion is
    law intensive and there are many considerations that must be reviewed with your
    lawyer. Your broker can assist with marketability and prospective profitability based
    on local comparables. Also, surveyors, engineers and other specialists must be retained
    to complete the project. As with any real
    estate project, make sure your professionals
    will commit to your budget and time frame.

  • Identify the right property. Find an existing building that has uniformity of space, so it
    will divide easily and equitably, and be conducive to multi-unit access. Targeting a specific clientele is an option, but it must be permissible in the jurisdiction and practical with
    respect to market absorption. Having ‘Class
    A’ construction is helpful because it appeals
    to condo buyers on an emotional ‘gotta have
    it’ level. After all, the necessity for a developer to contribute capital and time toward
    improvements diminishes the attractiveness
    of this type of project and threatens to interfere with a fragile time schedule.

  • Run a financial analysis. Run a market
    analysis, set prices for the units and be certain the sum of the parts will be greater than
    the total cost. Aim for enough capital through
    pre-sale activities to close on the acquisition.
    Be wary of small concessions to buyers
    because the aggregate cost could equal a significant blow to the bottom line.

  • Secure buyers and draft documents.
    Focus on selling units to effectuate the simultaneous acquisition and conversion. The
    quality of the buyer and likelihood of closing
    on time are important considerations.
    Negotiate and draft the governing documents
    and make sure the buyers will be properly
    represented in the association. In some
    cases, the developer will have to act as an
    umpire to balance the long-term sustainability of the condominium where separate unit
    owners are inclined to push for control.

  • Proceed to the close. At closing, your
    lawyer can facilitate the acquisition closing,
    condo creation and unit re-sale closing.

Is there a downside to conversions?

If a key party defaults, which is largely out
of your control, there’s always the potential
to lose money on the project and face repercussions. The reality exists that the market
may not have yet bottomed out, and unit
owners could experience a loss in the value
of their units after purchase. The entire
scheme is not cheap: the developer will,
among other things, get hit with double closing costs, whereas the buyer will likely need
cash to close. Both developers and unit purchasers should consult their accountants to
assess further financial disadvantages.

JONATHAN H. LEHMAN is legal counsel for Prudential CRES Commercial Real Estate SFL. Reach him at (561) 995-8887 or
[email protected].

Global benefits

Today’s business climate increasingly
requires companies to compete globally. But hiring and retaining people outside the U.S. can be a challenge. Expanding
employers are often concerned about competition for talent, so they adopt benefit programs tailored toward the local practice
within each country. But as companies become more established globally, governance,
operating efficiencies and cost-effectiveness
emerge as top priorities. Employers suddenly discover the need to wrap their arms
around disparate benefit programs in an
effort to implement effective governance
practices and leverage their global benefits
spending while also stemming rising benefit
costs. Even with limited internal resources,
employers can achieve more effective management of global benefit programs by leveraging multinational pooling arrangements.

“The natural progression is that companies
first expand to operate as a multidomestic
company, then become multinational and
then continue expanding until a global footprint is established,” says Dana Shay, senior
consultant for the International Practice at
Watson Wyatt Worldwide. “But over time,
benefit costs and the need for better governance increase and companies find they can
no longer afford to operate with a multitude
of plans in different countries without an
overall link.”

Smart Business spoke with Shay about the
benefits of multinational pools and improved
vendor leverage.

What is a multinational benefit pool?

Multinational pooling is a system under
which the benefit plans of local subsidiaries
or divisions in various countries are brought
into a single unit or ‘pool’ for the purpose of
reducing their risk charges and administrative overhead. The concept applies for most
employer-provided insurance coverages,
such as death, disability, medical and accident and also for insured retirement plans.
The insurance plans are written as local policies in line with local regulation but then
assessed as a single group for underwriting
terms and conditions and experience rating.
Pooling solutions are available for both large
and small companies through either company-specific or multiclient plans. If your company has at least two insurance contracts in
place with local insurance network members, it is usually possible for the parent company to establish a multinational pooling contract with the network. If your company is a
large multinational with several international
affiliates, you can usually take advantage of a
company-specific solution that spreads the
risk across various countries. If it is less international with fewer affiliates, you can usually
join other companies in a multiclient pool.

What are the financial advantages?

Multinational pools allow for second stage
accounting of all benefit programs, so
employers can see the total amount of premiums paid and plan expenses and claims
annually on a consolidated basis. The balance of premium paid less claims and less the
insurer’s expense charge produces a potential international experience rating refund (or
pool dividend). Multinational employers are
able to spread the risk of adverse experience
over a larger group and are able to take
advantage of favorable claims experience on
a global level, because any surplus then generated by the pool will flow to the multinational employer in the form of an international dividend. Employers are also able to leverage their purchasing power and obtain more
favorable pricing. Last, having fewer contacts
and a single communication point allows
employers to reduce the internal resources.

What are the nonfinancial benefits?

In addition to receiving detailed financial
reports on a regular basis, a multinational
employer will be able to identify any problem
areas, such as cost escalation or claims incidence, and the reporting will aid with global
governance requirements. Also, employers
can receive improved service through service-level agreements and performance guarantees, which are much easier to initiate and
manage through the large volume of business
that a multinational pool represents.
Underwriting conditions may also be eased
as the network will tend to base its terms and
requirements on the worldwide total of covered lives in the pool.

How can effective vendor management drive
cost savings?

First, review your benefit programs annually to see what plans are being offered and
gain a fresh perspective on consolidation and
cost savings opportunities. Each quarter, review reports and claims detail to enable good
information flows between the company and
its vendors so you can take proactive steps if
experience appears to be trending poorly.

Second, it may be possible to consolidate
brokers within a single country or even do
without a broker at all. Review the total number of brokers your company is using in each
country and the total brokerage fees to see if
one broker might be willing to secure all the
needed coverage for a reduced fee. Or, place
all the coverage with a single carrier in each
country, which might enable a staff member
or your multinational pooling network to
manage the plans without the help of a broker. In some cases, it might be more cost
effective to add a staff member in lieu of brokers for oversight purposes, or the management of global benefits plans can be outsourced to a third-party provider.

DANA SHAY is a senior consultant for the International Practice at Watson Wyatt Worldwide in San Francisco. Reach her at (415) 733-4133 or [email protected].

Defined contribution plans

In the last five years, employers have
increasingly switched from defined
benefit (DB) retirement plans to defined contribution (DC) plans to
reduce the cost of long-term pension
benefits. But while DC plans, usually
offered as 401(k) or 403(b) plans, may
appear to have a strong financial upside
for employers, in the long-term they may
find they actually had greater control
over the retirement of peak-earning
employees under traditional DB plans,
not to mention the retention power DB
plans created for mid-career employees.

“DC plans don’t have the incentives
employers need to encourage early
retirements and, on the flip side, they
aren’t as effective in retaining workers,”
says Jennifer Grant, FSA, EA, senior consultant with the Retirement Practice with
Watson Wyatt Worldwide. “Employers
have a strong economic need to control
and predict when employees leave, so
the decision to switch to a DC plan
should be carefully considered.”

Smart Business spoke with Grant
about the trends in retirement plans and
how employers can regain control.

What are the trends in pension plan
design?

Faced with substantial long-term pension obligations, employers have closed
their DB plans to new employees and
grandfathered existing workers, while
still others have frozen DB accruals coupled with adding or increasing their non-matching DC contribution or increasing
their match for existing workers. Since
1996, 40 percent of companies have
switched to DC plans, according to a survey of 300 employers conducted by
Watson Wyatt Worldwide. As employers
have increasingly moved to DC plans,
employees are faced with the financial
burden of planning for their retirement.

What’s the impact from the trend?

Many employees are financially unprepared for retirement. To replace just 25
percent of their pre-retirement income, employees need to save three to four
times their annual salary. But a recent
survey of employees between the ages of
50 to 64 with 20 years or more of participation in a DC plan revealed that 39.6
percent had accumulated less than one
times their annual salary. In general,
employees begin saving too late, don’t
save enough, make poor investment
decisions, take hardship withdrawals or
fail to rebalance their portfolios (taking
on more risk than planned).

During 2000 to 2002, the equity market
declined and employees lost a huge
amount of value in their retirement
accounts. The result is that employees
are opting to work longer and, as they
age, their productivity often declines
while their salaries are at career highs,
and younger employees are not able to
advance in the organization. Under traditional DB plans, retirement patterns follow a more consistent path, whereas,
with DC plans, employees are in control
of their retirement dates and patterns
are unpredictable and rely upon the market and workers doing the right things at
the right time with their investments.

What are the solutions for employers?

Employers with DB plans can mitigate
their risk through plan design and investment strategy. To control inflation risk,
move away from final average pay plans
to career average salary or cash balance
plans that provide an annual accrual
each year similar to a DC plan. These
types of plans protect employers from
unanticipated wage inflation that can
drive up pension costs.

Additionally, employers should analyze
their pension fund investment strategy
and consider reducing the risk in their
portfolios using greater fixed income
allocations with durations that closely
match pension obligations. The early
2000s brought the message home that
using volatile assets to secure pension
obligations (which can increase and
decrease along with interest rates) is
risky. Although equity investments are
expected to outperform bonds in the
long-term, bonds respond to interest
rates in the same direction as pension
obligations, mitigating interest rate risk
and short-term volatility.

What other steps should employers take?

Certainly anticipate all the ramifications of change and look at a wide range
of financial scenarios to know how your
company’s pension plan impacts employee tenure, costs and your company’s ability to attract new workers. The
projected shortage of oil and gas engineers here in the Houston area wasn’t
always anticipated, yet previous benefit
decisions will impact how those companies manage through the next decade,
so the lesson is this: Don’t act hastily
and don’t make plan decisions strictly
for savings. In many cases, employers
have carefully vetted their options and
made formal decisions to stay committed to their DB plans.

JENNIFER GRANT, FSA, EA, is a senior consultant for the Retirement Practice at Watson Wyatt Worldwide. Reach her at (713) 507-1700 or [email protected].

Credit is king

No matter how dark the cloud may
seem, there’s always a silver lining.
For those with good credit and good investment sense, the silver lining
just might be the abundant opportunities
in the commercial real estate market.
Banks, reeling from the credit crunch,
have money to lend and need to rework
their books of business. With underwriters on the hunt, creditworthy borrowers
should be searching for good properties
if they want to take advantage of the current opportunities in the commercial
real estate market.

“Banks need to lend, but they want
quality deals,” says Jerry Lehman, CCIM,
SIOR, CEO, president and principal broker of Prudential CRES Commercial
Real Estate SFL. “Interest rates are close
to all-time lows, and the liquidity crisis
on Wall Street has had a major impact on
the commercial real estate market. This
is an opportune time to look at investment properties or leasing space.”

Smart Business spoke with Lehman
about the impact of the liquidity crisis on
the commercial real estate market and
how savvy investors can capitalize on
the current opportunities.

How has the Wall Street liquidity crisis created opportunities in commercial real
estate?

Many Wall Street firms are reeling from
losses in the subprime residential mortgage market. These firms began pulling
out of commercial mortgage commitments in order to protect their cash and
liquidity. Also, many individuals with
large amounts invested in money market
auction-rate bonds were shocked to find
that their funds couldn’t be withdrawn
because the market for these bonds disappeared almost overnight, freezing the
money market deposits. All of these
events have had a profound impact on
the commercial real estate market.
There are more sellers than buyers,
prices have fallen and lending rates are
favorable. For investors or executives that have a specific real estate need,
investment goals and good credit, the
opportunity to make a deal has never
been better. While there’s less competition for good buildings, there are also
fewer lenders funding deals because the
institutional lenders are virtually gone.

What are the best deals right now?

Multifamily residential properties are
currently good investments. With many
families losing their homes, vacancies
are on the decline, so apartment buildings are attractive right now. Also, small
and midsize industrial buildings, anything under 50,000 square feet, are a
good investment because there’s always
a shortage of those on the leasing market, so you’ll generally have no problem
finding tenants. Office buildings currently have higher vacancy rates than normal
because many real-estate-related businesses have closed. But if you can hold
onto the property for a while and ride
out the current economy, it will be a
good investment as the occupancy rates improve. The best value of all is vacant
land. Owners are desperate to sell, but
vacant land is definitely a longer-term
hold. So if you invest in vacant land, plan
to keep it for a while.

What are the current lending qualifications?

You’ll need 20 to 25 percent down and
good credit. It certainly helps if you
come into the bank and open a new
account because new depositor relationships will garner a more favorable rate.
You’ll also need strong company or personal financial statements, and the cash
flow of the property you’re considering
needs to be favorable. Banks want quality properties and quality deals right now.
Quality properties are defined as those
with a good location and good demographics for the specific use. For example, if the purchase involves an industrial or office building, they’ll consider the
location, cash flow and the strength of
the tenants in assessing the deal, and
they’ll also consider the physical condition of the property.

What professional support and relationships will investors need?

Even if you’re conducting a small
transaction, it’s advised that you are
assisted by a lawyer and accountant, but
you’ll surely need that type of professional support to act as an advisory team
for larger transactions. If you have a current banking relationship, it’s helpful,
but if not, a qualified broker with solid
community relationships should be able
to refer you to a lender. Also, make sure
your broker understands the marketplace and your needs so they match you
with the right property for your budget
and your investment goals.

JERRY LEHMAN, CCIM, SIOR, is CEO, president and principal broker of Prudential CRES Commercial Real Estate SFL. Reach him at
(561) 995-8887.

Global governance

Many companies are benefiting from
completing a global governance
review of their international compensation and benefits plans because the
process exposes previously unidentified
hazards that need addressing. However, in
addition to these more traditional benefits,
the global governance process has also
yielded some unexpected prizes in the
form of cost savings, increased synergies
among global human resources teams and
access to a more strategic approach to
international work force planning.

“As companies take a closer look at the
benefits and compensation detail for
employees located outside the U.S., they
are uncovering previously unknown risks
and financial exposure,” says Linda Tran,
International HR Consultant and Texas
Office Practice Leader for the international
practice at Watson Wyatt Worldwide.

Smart Business spoke with Tran about
how CEOs can reap the benefits and mitigate risk through global governance.

What are some of the risks related to inadequate governance?

Sarbanes-Oxley requires executives of
multinational companies to be aware of
the risks that lie outside of their U.S. operations before they sign-off on the companies’ financial statements. The risks can be
legal or financial or risks to their reputation. Some notable examples of risks
uncovered by increased due diligence
around compensation and benefits
through the global governance process are:
large unfunded benefit liabilities that consequently required an unexpected significant cash infusion; operational compliance
issues where local practices were in
breach of legislative requirements; bonus
plans, which were intended as discretionary but became mandatory due to
poorly written employee contracts in one
European country; inaccurate reporting of
non-U.S. liabilities, which required an
amendment to the company’s 10-K; international pension plans intended for expatriates and key local nationals being
offered to all local country employees; and
benefit inconsistencies between employees working in the same location.

Given the speed of global expansion,
often through acquisition, HR frequently
grandfathers existing compensation and
benefit plans in order to retain key employees, without full knowledge of the legal
implications or potential overlap with
other existing plans. Later, a more detailed
review exposes the risks of such practices
and provides employers the opportunity to
mitigate them.

How can global governance reviews be more
strategic?

Compensation and benefit plan effectiveness should not be evaluated in a vacuum,
so the discussion naturally leads to other
strategic HR discussions like succession
planning, bench strength, staff development as well as employee recruiting and
retention efficiencies. Evaluation teams
can also examine whether existing plans
are in line with the company’s compensation and benefits philosophy and if total
rewards will actually support the company’s growth plan. Many companies have
disparate plans and globally dispersed HR
teams; the governance process allows for greater collaboration and the sharing of
best practices between these groups. Using
a holistic approach to the governance
process will traverse tactical reviews with
strategic dialogues.

How can companies develop a global governance process and review structure?

Assessment, strategy and structure are
the three components of initiating an effective global governance process.

The ‘assessment’ phase begins by uncovering what compensation and benefit plans
your company has through a detailed
inventory of the existing plans. The information collected is then audited for risk
exposure and assessed on its alignment
with the company’s global benefits strategy. The ‘strategy’ phase helps the company
focus on how to better design, finance and
deliver plans globally. The final phase is to
establish a process and ‘structure’ for
ongoing reviews that combines the people
involved, the process itself and the technology used to support it. The ‘structure’
phase is an opportune time to develop a
governance framework for making decisions. I often refer to the inventory and
audit process as the five Cs analysis, which
poses these critical questions:

 

  • Compliance: Are all compensation and
    benefit programs in compliance with local
    and national laws?

     

     

  • Competitiveness: Are the reward plans
    effective in attracting and retaining the talent
    needed to meet the company’s growth plan?

     

     

  • Consolidate: Are there opportunities to
    eliminate benefit plan overlap or achieve
    savings through benefit plan mergers?

     

     

  • Consistent: Are the rewards delivering
    their intended value? Do they dovetail with
    your company’s rewards philosophy and
    growth plan? Are the plans offering similar rewards for like performance across
    geographies?

     

     

  • Cost-effectiveness: Are there opportunities to deliver improved results at lower
    cost?

 

Throughout the process, look for chances
to deliver improved results at lower cost.

LINDA TRAN is an International HR Consultant and Texas Office Practice Leader for the international practice at Watson Wyatt
Worldwide. Reach her at (713) 507-1759 or [email protected].

Build or renovate?

The idea of moving your business into
a brand-new custom building can be
tempting. The benefits of a floor plan tailor-made for your business might be
worth any additional costs. On the other
hand, renovating an existing building might
be faster and less expensive, but compromises might be necessary. One thing is certain, both choices have their pluses and
minuses, so in order to make the best decision, CEOs should investigate the costs,
feasibility and time required for each
option because mistakes can be costly.

“When you opt for new construction, you
need to be certain you’ll be able to get the
building permits and land entitlements
you’ll need or else the project just won’t
happen,” says Michael Scarpino, CCIM and
senior director with Prudential CRES
Commercial Real Estate in South Florida.

Smart Business spoke with Scarpino
about what CEOs should know before
deciding between building and renovating.

How do entitlements and zoning impact the
decision to build or renovate?

There might be fees and zoning issues
associated with brand-new construction on
vacant land that you won’t face if you opt to
purchase and renovate an existing building,
simply because the land use is established
and the supporting infrastructure is paid
for. With new construction, you might be
assessed impact fees for the building of
roads or sewers, and it might take some
time to investigate whether the current zoning will support the proposed construction
plan or if you’ll be able to get the necessary
entitlements for things like parking. It’s
sometimes possible to purchase vacant
land that is already platted, meaning the
entitlements and land use have been decided, which will save time and money.
Sometimes under the right circumstances,
new construction is not more expensive
than renovation or it’s worth the extra
investment to get exactly what you want.

How does location impact the decision?

The location of the property has a huge
financial impact, especially long term. If
your business needs proximity to rail lines or major highways, that requirement might
be the most important decision criteria,
and if the land is vacant, you’ll need to
know if and when the long-term master
area plan provides access to major transportation lines. Also, neighbors may pressure local officials to turn down your plan,
if they perceive it will have a negative
impact on traffic, community aesthetics or
property values. Last, accessibility to a
work force with the required skills is a
major location consideration because having to pay long-term premiums to commuting workers can eat away at savings gained
through an advantageous construction or
renovation deal. Both the state of Florida
and some local governments offer incentives and tax advantages to businesses that
locate within enterprise zones, but only a
thorough analysis can determine if this
might be the right move for your business.

What’s the time required for each option?

Generally, the escrow and due diligence
process required to purchase an existing
building takes about 90 days, and then renovation can take anywhere from three months to two years, depending upon the
extent of the construction. When building
from the ground up, expect a six-month
escrow and then six to nine months for
construction. If you need to move quickly
or during your business’s off-season, do
your homework because it’s very costly to
move twice or take short-term lease extensions. It’s also important to factor in the
costs of production downtime or the
options of moving in stages versus all at
once. Run a profit and loss statement for
every possible scenario, looking at all the
impacts and costs, in order to make a
sound, unemotional business decision.

How do industry-specific construction
requirements factor in?

Build new or renovate decisions are often
greatly influenced by the extent of renovations required to retrofit an existing structure. For example, if your company stores
dry goods and that necessitates extensive
architectural and engineering changes to
an existing building in the form of new ceiling heights, ventilation, fire sprinklers and
loading docks, you might be better off with
new construction. If the previous owner
was in a similar industry and the building
flows properly, renovation might be more
cost-effective.

What should CEOs do to evaluate their
options?

The best thing CEOs can do is surround
themselves with experienced professionals who will provide honest recommendations and expert advice, not just tell them
what they want to hear. Consider a team
approach that includes a lawyer, accountant, banker, a real estate professional, the
architect and the engineer to help you evaluate your options and navigate the
process. Check their references because
inexperience can lead to mistakes.

MICHAEL SCARPINO, CCIM, is senior director with Prudential CRES Commercial Real Estate in South Florida. Reach him at (954)
491-4709 x103 or [email protected].

The quality solution

For many employers, the attraction and
retention of key talent has surpassed
the rising cost of health care as the most pressing human resources concern, despite
the fact that data provided by the National
Business Group on Health shows that health
insurance costs are now 78 percent higher
than they were just five years ago. In recent
years, employers have increasingly shifted
the cost of health care onto employees in the
form of higher premium allocations and
health plan design changes. Now that recruiting and retention have become primary concerns, employers are reluctant to continue
redirecting costs because employees are
seeking greater economic security. However,
a solution for both parties lies in an untapped
cost management strategy.

“Shifting the cost of health care onto
employees does affect total rewards,” says
Jason Mahler, FSA, MAAA, consultant for
Group and Health Care at Watson Wyatt
Worldwide. “So employers are trying to find
win-win solutions. Currently, there are significant issues with the quality of care provided
within our health care system. Reducing
errors and improving medical outcomes will
go a long way toward controlling costs, so
employers have an interest in helping employees select the highest quality providers.”

Smart Business spoke with Mahler about
how employers can help employees select
quality health care providers.

What’s the first step to help employees?

The first step is to educate your employees
about how to evaluate and select providers.
Put together a communication campaign that
educates employees about evaluation criteria for hospitals and physicians. Many people
select hospitals and physicians based upon
location and reputation, but instead, they
should base their decisions on proven statistical measures, such as procedural outcomes
and procedure volume. Patients should
review the provider’s specific results for the
procedure under consideration, including
mortality and complication rates. Patients
should consider the number of like procedures completed at the hospital and by the
physician, because experience is correlated
with quality. If a hospital rarely performs cardiac procedures but frequently provides orthopedic care, chances are good that its
outcomes will be better in orthopedics.

Next, provide employees with sources of
information that will assist them in evaluating providers. Your health insurance carrier
may list provider ratings on the members’
section of its Web site. Third-party information sources are also available, such
as HealthGrades (www.healthgrades.com),
which reviews physicians, hospitals and
nursing homes. Last, teach employees what
questions to ask providers and help them
become comfortable asking for the information they need to make their decisions.

What guidance should employers provide?

A more targeted approach is to review the
medical data of your employee group, determine the most common medical procedures
and then research the ratings of the local
providers for those procedures. Mail a scorecard with local hospitals and their quality ratings to your employees’ homes. This targeted communication helps educate employees
by providing each hospital’s specific scores
and explaining the criteria used, but, at the
same time, it eliminates much of the time-intensive research, which makes it easier for employees to make quality-based selections.
The data analysis and provider lists must be
location-specific, so they take a bit of work,
but it’s worth the effort when you consider
all the costs associated with a single repeat
procedure.

Should employers provide financial incentives for selecting quality providers?

If employers promote quality information,
reinforce the decision by providing employees with financial incentives to select the
highest-performing providers. For example,
designate area hospitals as centers of excellence for specific categories of care, and provide employees with incentives to utilize the
designated facilities. Potential incentives
include eliminating deductibles or co-pays
associated with care received in the designated hospitals or contributing funds into an
employee’s Flexible Spending Account or
Health Savings Account when they utilize
centers of excellence for certain procedures.

What other steps can employers take?

Consider providing employees with health
coaches or health advocates, who can assist
them with provider evaluations. These professionals should have information about
your company’s center of excellence facilities and financial incentives, so they can help
employees make the most cost-effective
choices. Oftentimes, employees are more
comfortable calling an independent source,
like a coach, who can walk them through the
process and answer questions. For employers, offering a health coach provides a fully
integrated solution and a unified approach to
the challenge of helping employees select
providers based on quality. Many employers
make financial advisers available to assist
employees with their 401(k) investment
choices. Similarly, an employer’s role in
health care can be to provide employees with
the tools, information and support necessary
to make wise decisions. It’s easy to see the
potential return when you consider the
avoidable costs associated with medical
errors, complications and readmissions.

JASON MAHLER, FSA, MAAA, is a consultant for Group and Health Care at Watson Wyatt Worldwide. Reach him at (713) 507-1796
or [email protected].

Avoid costly surprises

Many prospective tenants automatically assume that common area maintenance costs are the same from one building to the next, and many never even
inquire about what they include. It is also
important to know who the landlord is that
they’ll be dealing with, and who the property
management firm is, before signing a lease.

“You’d be surprised,” says Mara Porras,
president of Prudential CRES Property Management. “Sometimes, tenants are responsible for certain expenses within their premises (i.e. HVAC repairs, janitorial expenses or
plumbing repairs), which they may not be
aware of unless they read their lease thoroughly. These issues won’t come up during
lease negotiations unless prospective tenants
bring them up, so the best thing to do is ask a
lot of questions and know all of your financial
liabilities before signing on the dotted line.
What may be referred to as customary is
often not practical nor financially profitable.”

Smart Business spoke with Porras about
what questions CEOs should ask before signing a lease agreement.

Why does the property management company matter?

It is important to know who is your landlord and/or property management company.
The property management team is the ‘face’
for the ownership; they are the ones who
oversee the maintenance of the property. The
responsiveness of the management team
reflects the owner’s commitment. It is important to know the involvement that the ownership has in the operation of the building,
and it is important to know the management
team and its response to the day-to-day maintenance issues that may arise.

Many times, tenants do not give much consideration as to whom they will be dealing
with once the lease is signed. It is only once
something goes wrong (i.e. maintenance
issues, increase in operating expenses or
management issues) that they then want to
know who the parties are.

What should CEOs ask about building operations?

You want to ask about and become familiar with the building rules and regulations because they may affect the way your company does business as well as your bottom
line. Some questions to ask are:

  • Is the building ADA compliant and, if
    not, how does that affect your work force,
    and whose financial liability is it?

  • Are you allowed to leave your company
    vehicles in the building parking lot
    overnight?

  • Do any of your employees smoke, and if
    so, where are the designated smoking
    areas?

  • If you want janitorial service during the
    day instead of during the evening, will they
    accommodate your request and at what
    cost?

  • Are you separately metered?

Today, many employers are very concerned about providing adequate security
for their employees, especially if they work
evenings and weekends. Inquire about building security and if the cost of security is
included or if it’s invoiced separately to each
tenant. Ask what time the building doors are
locked because access limitations may
affect your customers and your business.

What hours does the building HVAC system
operate, and can you operate the system
after hours; what is the charge for this? If
your business receives deliveries (i.e. large
and/or heavy equipment or files), does the
building have the ability to accommodate
these deliveries? Does the building have the
floor load to handle this? Are there designated hours to receive deliveries?

And of course, here in Florida, you’ll want
to know who determines when the building
will be closed and when it will open following a major weather event like a hurricane.

What should CEOs know about equipment
maintenance?

Do you require a backup generator? Who is
responsible, and how many companies are
connected? You will also want to know who
is responsible for maintaining the general
building equipment (i.e. HVAC equipment,
plumbing repair, electrical repairs, elevators). Does the space require special lighting
and, if so, who is responsible for the replacement and repairs?

If you generate large quantities of rubbish
(i.e. boxes, pallets, etc.), ask if there’ll be an
additional charge for disposal.

What questions might expose hidden costs?

Ask about insurance and when it is scheduled to renew; get a history of what the premiums have been for the last two years.
Insurance in South Florida can increase
tremendously depending on whether or not
we have an active hurricane season. This is
an expense that all owners must be aware of
because it can affect the bottom line.

If the building was sold within the past
year, has the building value been reassessed,
and do the real estate taxes reflect the new
assessment? Are there any major repairs and
replacements planned for the building? Are
there any code violations pending that could
be considered a pass-through to the tenants?
It is critical to ask a lot of questions. You are
the only one that knows your business and
your requirements.

MARA PORRAS, CPM, CCIM, RPA, is president of Prudential CRES Property Management. Reach her at [email protected]
or (561) 549-0323.

Leasing alternative

In the recent past, a search for suitable
properties in South Florida was often
fruitless, as land designated for small-scale buildings was snatched up for larger projects and soaring construction
costs placed ownership out of the financial reach for most small to midsize business owners. Now, there’s an alternative.
The advent of the commercial condo has
brought the benefits of property ownership to CEOs of any size business.

“Business owners don’t get a return
from paying rent,” says Ted Ciaccia, senior director for Prudential CRES Commercial Real Estate South Florida. “In
today’s world, rent for a commercial
space is often only a few dollars less per
month than the mortgage payment on a
commercial condo and leasing offers
fewer benefits.”

Smart Business spoke with Ciaccia
about the business and financial advantages of commercial condo ownership.

What’s the business case for buying versus
leasing?

In South Florida, the average industrial/flex commercial rental rate is $12 per
square foot. Add to that about $4.50 per
square foot for the operating expense
pass-through costs and sales tax of 6.5
percent and the total effective rate per
square foot for leased space is roughly
$17.57. Your cost for a condo would be
around $15.04 per square foot using
these assumptions: 20 percent down,
purchase price of $150 per square foot
and monthly loan payments of around
$10.64 per square foot, then add to that
your share of any operating costs and
property taxes.

You can also deduct your real estate
taxes because, with a condo, property
taxes are billed directly to the owners;
they aren’t included as part of the operating expense pass-through charges. In
the buy versus lease financial analysis,
after four to five years of ownership, real
estate will no longer be an outgo, rather
you will be making about $2 to $4 a
square foot, given an average market
appreciation during that time of $2 to $4.

Won’t condo ownership hamper my business expansion?

I have one client who purchased three
units, and now he’s leasing out two of the
spaces until he needs them. He not only
receives the financial benefits from his
purchase in real time, but he’ll save
$50,000 to $100,000 by avoiding moving
costs when he’s ready to expand his business. The other consideration is that
lease rates continue to escalate whereas
the condominium payment is fixed.
Having fixed real estate costs frees up
capital for investment and facilitates
long-term planning, not to mention the
fact that you’re building equity, which can
be used for future business expansion.

Will ownership facilitate unique real estate
requirements?

The inability to supply ample parking
ranks second highest on the list of commercial real estate failures. Business
offices are typically allocated only three
to four parking spaces per 1,000 square feet of space in commercial leases, yet
doctors, for example, require at least five
to six spaces for each 1,000 square feet.
In commercial condominium projects,
there’s more flexibility, especially around
things like parking allocation, and often,
the buildings are designed around industry-specific needs.

Here in South Florida, for example, you
generally have to lease a building with at
least 10,000 square feet to get a dock-high
loading area, but with a condo, the buildings are often customized to meet the
needs of service-oriented manufacturers,
so owners can have access to those special amenities without the huge lease.

Further, commercial condo ownership
allows business owners to renovate their
space, designing their interior build-out
for customized needs. Because you won’t
face the prospect of moving every few
years, necessitating that you leave your
tenant improvements behind, you’ll feel
better about investing in your space,
which is great news for physician owners, who average a 25 to 30 percent higher build-out cost than traditional office
dwellers.

How does ownership afford greater control?

First, there’s no absentee ownership
with condos and owners have pride of
ownership when compared to renters,
which is reflected in the building and
grounds maintenance. Also, while landlords have an obligation to hold operating
costs down, there’s really no motivation
under a leasing structure to do so. As a
result, pass-through costs often escalate
while the quality and responsiveness of
the building management team can be
less than adequate. As an owner, you’ll
have a voice in how things get done, how
the building looks and, if the owners
choose to outsource the property management, you’ll be able to weigh in on
that organization’s selection. Lastly, you
no longer face many of the business
restrictions imposed by leasing.

TED CIACCIA is the senior director in the Broward office for Prudential CRES Commercial Real Estate South Florida. Reach him at (954)
491-4707 or [email protected].