A view of commercial office leases from a CPA’s perspective Featured

8:00pm EDT April 30, 2012
A view of commercial office leases from a CPA’s perspective

I was recently involved with a commercial lease transaction that yielded the greatest percentage savings and bottom line impact to a company that I have witnessed in my 28 years as a Certified Public Accountant.

This is saying a lot, as I have a background in corporate finance and auditing with Ernst & Young and Lockheed Martin Corp. I have been deeply involved with strategic, long-term business planning, corporate turnarounds and taking private companies public. My clients looked to me for expertise on increasing revenue, reducing costs and creating value. They also want quick results with minimal disruption to their business and customer relationships.

In addition to other duties, I review and provide financial analysis on commercial real estate transactions. As a CPA, I know that the most significant costs to a company in the general and administrative line items on the profit and loss statement are typically personnel and real estate expenses.

When developing a long-term strategy, what should analysts consider?

When assessing a business valuation or developing long-term strategy, it is commonplace for analysts to simply consider real estate and related expenditures as fixed costs as they relate to leases that are in place that cannot be changed.  Moreover, they feel that the fair market system and competitive market forces will be the primary driver of these costs.

This brings us to my experience with the real estate transaction referenced above.  The company in this case is a multinational corporation headquartered in Europe, with offices in the United States. It has a very sophisticated executive team and was in need of expanding operations to meet new business demands — which was nice to see given the depressed business climate over the last few years.

The company was not represented by a real estate broker because its landlord had convinced it it could negotiate better terms without one, as he would pass along the commission savings to it. That sounded plausible, so the company proceeded without representation and its CFO commenced negotiations.

The CFO was very capable, and after three months of negations, remained unsettled with regard to the progress he had made given the landlord’s best-and-final terms. Frustrated, he finally conceded to meet with real estate brokers that had been calling to represent the company’s interests. After interviewing several firms, the company hired Robert Chavez of Guardian Commercial Realty.

The company’s executives were impressed with Guardian’s market knowledge and cost-reduction strategies, and especially surprised that Guardian guaranteed results. The company also learned about ‘exclusive tenant brokerage’ for the first time from Guardian and understood that its interests would be protected by its broker — not the landlord’s interests.

This assignment was going to be particularly challenging in that the company had waited so long to consider other options that there were only a few months left before their existing lease expired. Its landlord was clearly using this as leverage and was convinced that the company would not, or could not, relocate in the time remaining.

How can a real estate broker reduce costs and risks?

Because I attended these meetings and completed the Financial Cost Comparisons, I can unequivocally attest that Guardian reduced the company’s occupancy costs by nearly 30 percent, or $1.3 million, as compared to the transaction it was about to sign. Guardian was able to condense months of due diligence and negotiations into a 34-day turnaround from start to finish. Guardian utilized third-party experts to complete space programs and efficiency studies, found a building with a floor plan that better suited the company’s unique layout (with far superior views), reduced the rental rate, and increased landlord concessions and construction allowances to achieve these incredible results. Guardian even negotiated short-term, temporary space at a highly reduced cost to avoid any holdover issues at the existing location.

I also noted that the $1.3 million savings dwarfed the amount of any commissions.  It was clear that the existing landlord’s initial offer of passing along savings from commissions was nothing more than a ploy to keep its tenant from becoming informed and guided by an experienced real estate professional.

As a CPA, watching this company save so much money without paying any fees or having to employ drastic cost-cutting measures such as layoffs or scaling back operations was impressive, to say the least.  From my perspective, if a company has a profit margin of 10 percent, it would have to increase sales by $13 million to achieve these results. Never in my career had I seen such astonishing and tangible results in such a short period of time.

To my amazement, Guardian’s work did not stop once the business points had been agreed to. It worked in conjunction with the company’s legal counsel and offered additional comments and strategies that were utilized to consummate the transaction.

The end result was a very satisfied client. By utilizing a real estate expert that focused on exclusively representing tenants, the company was able to relocate into a building with a more efficient and impressive floor plan while reducing costs and risk in the process.

As I see it, these results will continue to pay dividends to the company over the long-term lease. It is likely that office rents will escalate and the company will enjoy a competitive advantage over its competitors as a result of the hard work I witnessed firsthand.  What can I say — numbers excite me — I’m a CPA.

I was so taken by the impact of this transaction that I have made a personal decision to learn more about the business of tenant brokerage and become actively involved in the process.  I see now how traditional brokerage models have conflicting interests as they try to represent property owners and tenants.

For more information about Guardian Commercial Realty, contact Robert Chavez at (310) 882-2060 or Robert.Chavez@GuardianUSA.net.

Insights Real Estate is brought to you by Guardian Commercial Realty