In January 2007, the San Diego Regional Water Quality Control Board adopted a revised National Pollutant Discharge Elimination System (NPDES) permit that requires local governments to further control urban sources of water pollution. As the effects of the amendment trickle down, many business and all new construction projects will be directly impacted.
The permit requires the proper management of runoff from rain and even housekeeping and gardening activities. In some cases, the runoff will need to be treated on-site before it can be released into the municipal storm drain system. Such treatment will require the local installation and maintenance of a water treatment system. The permit requirements will add to the construction costs of new homes or typical business development projects such as new parking lots.
“The new permit requirements not only are more extensive, but they require measures of effectiveness,” says John Lormon, chair of the Environmental and Land Use Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. “All of this will have an impact on costs for homeowners, businesses and taxpayers.”
Smart Business spoke with Lormon about the business effects imposed by the permitting requirements and how CEOs can prepare for the changes.
How will the new urban runoff management program affect the construction industry?
The construction industry will be affected in several ways. For example, that industry is going to see changes in terms of how much land can be graded at any one time.
Because grading can alter the amount of runoff water and the pollutants contained in that water, the permit may only allow for a limited disturbance of land at one time. This could affect construction time lines and potentially project costs.
There are also implications for low-impact development projects such as the construction of restaurants, parking lots or office buildings. When you convert ground that previously absorbed runoff to hardscape, you are changing the volume, velocity and makeup of the runoff. This change is a major concern for water quality regulators; thus, new restrictions are being imposed on development.
Creating additional hardscape can also cause runoff to alter streams, banks and beds, changing habitats. Where site development exceeds 50 acres, the project proponent will be subject to additional requirements, including development and compliance with a hydromodification plan. In time, most projects will be subject to these requirements.
The permit requires the local government to reduce the discharge of pollutants in urban runoff to the maximum extent practicable through various management practices [such as treatment and development of management plans], and these requirements will be passed down from local governments to development projects through ordinances and the land use permitting processes.
These same water quality issues will affect environmental review and could create new mitigation requirements, further adding to project costs.
Are there wider-reaching implications?
Certainly, CEOs should expect to see some of these costs passed through to them under triple net leases, and the permitting process may slow down new construction projects or build-outs. The cost impact may not be as immediate for CEOs who lease building space, but as those buildings undergo renovation, or if the CEO relocates or expands the business, there is the potential for impact.
Also, the agencies have developed stormwater civil and criminal enforcement initiatives. Wal-Mart recently paid a storm-water violation penalty of $3 million.
How will this impact the cost of doing business and the cost of construction?
The building industry says that this may add as much as $30,000 to the price of a new home. Other estimates project a $100,000 cost of construction increase for office buildings, while the cost to government and taxpayers is projected to be $250 million over the five-year life of the current permit.
What should CEOs do in anticipation of this urban runoff management program?
First, they should pay careful attention to site selection and keep both the stormwater quality impacts and the potential cost escalation in mind.
Second, they should anticipate that new construction might be slowed or impacted by the permitting process.
Third, as CEOs look at all new real estate transactions, they should do their due diligence and strongly evaluate projects that might result in hydromodification or treatment requirements.
Fourth, the SEC requires public companies to disclose environmental liabilities.
Last, keep budgets in mind. All of these changes are a consultant’s dream, and any time there are uncharted waters to navigate, consultants are usually hired to help pave the way.
JOHN LORMON is chair of the Environmental and Land Use Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. Reach him at email@example.com or (619) 515-3217.
Approximately 70 percent of clients are underinsured, according to Michelle Baxter, personal lines broker with West-land Insurance Brokers. “It is more expensive to rebuild a home than to build it because of demolition and debris removal costs,” says Baxter. “Many homeowners fail to take those expenses into account when they calculate their home’s replacement cost, if they aren’t advised by a professional broker.”
Smart Business spoke with Baxter about how to close coverage gaps and reduce liability exposure with personal insurance.
How often should I meet with my broker?
Your broker should review your portfolio annually, including an evaluation of all of your assets and your lifestyle. The broker should ‘shop’ your coverage needs among several markets to determine the best value and insurance carrier for you. I say value as opposed to price because coverage should be placed with an A-rated carrier and certain markets cater to high-wealth individuals, so their policies contain clauses that provide protection for the kinds of exposures that executives frequently have. Saving on premiums in the short run often can cost you more in the long run.
What is my broker’s role in reducing my exposure to loss and managing my needs?
You should have one broker, who should place all of your coverage with one insurance company.
Primarily, this allows your broker to view your entire lifestyle and portfolio of assets for gaps in coverage and potential exposure. For example, if you purchase a vacation home and secure the insurance coverage through escrow at closing, that policy might have liability limits of $300,000. Meanwhile, your personal umbrella policy is with another carrier and it provides coverage for losses that exceed $500,000, resulting in a coverage gap of $200,000, which could be avoided by having one broker who oversees all of your needs. Hiring occasional or full-time workers, such as a nanny or housekeeper, can also increase your exposure, as does renting out a vacation home, so all of this must be taken into consideration.
Also, placing all of your coverage with one carrier is generally more cost-effective because it allows for premium credits and elimination of costly redundant coverage.
Finally, your broker should be the first person you call in the event of a loss. When you report a potential claim to a carrier, all insurance companies are notified regardless if the claim gets paid. In some cases, especially where the claim may be below your deductible, it might be best not to report it at all. Your broker will know what the right answer will be for each situation.
What are examples of personal lines protection that executives should consider?
Your broker should suggest a personal articles floater if you own jewelry, rare wines, collectables, musical instruments or fine art, and all items should be appraised. This will cover the items at full value against loss or mysterious disappearance without a deductible. If you own a condo as a primary residence or as a rental property, you have personal liability exposure that extends beyond the master policy written on the condominium association. For example, if a fire starts in your unit and damages other units, you might have financial responsibility to others.
Extended replacement cost coverage for homeowners is another recommendation. It provides additional protection in the event you discover that you are underinsured after a loss. For example, if you have purchased $500,000 in replacement cost coverage for your home, and after a fire you find that it will actually take $550,000 to replace it, the endoresement clause will provide for $550,000 in replacement coverage automatically; you need only pay the additional premium. Also, you don’t have to settle for coverage limits provided by the California Earthquake Authority. A professional broker has access to other markets that provide broader coverage for reasonable rates.
What are the other benefits of working with a professional broker?
Brokers can assist executives with busy lifestyles by recommending appraisal firms, companies that will scan valuable documents or videotape your belongings, so you have a catalog of your assets. They can also assist in calculating accurate replacement cost values for your properties. As your wealth builds, so does your exposure to loss and your need for professional guidance. It takes years to build the American dream; it only takes a few minutes to lose it.
MICHELLE BAXTER is a personal lines broker with Westland Insurance Brokers with 20 years insurance experience. Reach her at firstname.lastname@example.org or (619) 641-3255.
Pam Gaffen works hard and plays hard, and she wants her employees to do the same.
“I am constantly searching for innovative ways to reward and motivate our employees,” says Gaffen, co-founder and co-owner of Gafcon Inc., a diversified construction consulting company. “My instinct is to nurture my staff. I believe employees who work and play hard and are consistently rewarded for their efforts are the most loyal.”
As part of those incentives, Gaffen provides lunch each day for employees and offers flu vaccines each year in the office.
“As a result, we have very few people out of work during flu season,” she says. “This is a real win-win. When an employee misses several days of work, it costs the company a significant amount of money in lost productivity. It makes sense to pay a doctor to administer shots rather than to take this risk.”
Gaffen founded Gafcon with her husband, Yehudi, in 1987, and today, the company has 100 employees. Gaffen’s husband runs the business development side of the company, while she handles operations.
Smart Business spoke with Gaffen about how she motivates her staff and manages growth.
Q: What key skills does a leader need?
The ability to hire and retain outstanding employees is essential. We don’t build machinery or sell a physical product. That’s not where our assets are; our business is all about people. Our assets go up in the elevator in the morning and go down at night.
To find the best employees, I start by reviewing their resumes. I tend to focus first on longevity. Our company is not meant to be a revolving door for employees. We are looking for employees to invest in our future and be part of the growth and reward of our organization.
During the interview process, I depend on my managers to assess technical abilities. I observe the applicant’s interactions during the process and rely on my intuition when making a hiring decision.
After bringing the best employees on board, great leaders keep them inspired and move them forward careerwise. I believe in allowing employees to expand their horizons. Sometimes a great employee will become intrigued with a different role in the company but lacks the education to be considered.
I will help him or her get the training and education needed. It can be the best investment you ever make. Not only does this employee now bring a broader base of skills and knowledge to the organization, they also feel a heightened sense of loyalty.
Q: What has been your greatest challenge, and how did you overcome it?
Growth can be a real challenge. We have had years involving 30 to 40 percent growth, and it’s been tough to keep up. Growth needs to be well-managed. Otherwise, it can get out of control quickly.
Some years will be flat, and that can be a blessing. You need time to catch your breath in order to do thoughtful planning for the future. Continuous huge jumps are not always healthy.
Another challenge was staying ahead of the technology curve. With changes occurring at such a rapid pace, we decided to make a significant investment in current and future technologies, giving our employees an opportunity to truly innovate.
One important area we addressed was the Web-based document management and collaborative portal environment. Today, we are starting to see a positive return on those decisions by empowering our people with better tools to do good work, while at the same time increasing value to our clients by providing anywhere/anytime access to information.
Q: How do your inspire creativity in your staff?
Creativity flows in properly managed brainstorming sessions. I constantly invite my employees’ opinions and regularly act upon them.
During these brainstorming sessions, I throw out ideas that may seem off the wall or unrealistic. This opens the door for out-of-thebox thinking from the group.
You can’t have real creativity without a comfortable and spontaneous flow of ideas including what may seem like silly ones. My job is to take all these ideas and filter out the jewels.
Q: How do you multitask?
I wear many operational hats, including legal, financial, IT, HR and marketing. I must rely on good talent, but I also need to be extraordinarily efficient. This includes careful delegation, organization and maximizing use of technology that helps me get the most out of every workday.
One other practice that has worked well for me is to work hard while at work but refrain from bringing work home. Especially in light of the fact that my husband and I are co-owners, it is important to have boundaries.
I want my personal space at home to reflect an aspect of me other than the professional. If I have work papers strewn everywhere or constant conversations about work while at home, I cannot achieve balance.
HOW TO REACH: Gafcon Inc., www.gafcon.com or (619) 231-6100
The bigger your business gets, the more attention you will attract. Bigger suppliers become interested in doing business with you, and bigger customers start to take notice. But you also will get attention from the aspiring businessperson, the one who runs a small operation but isn’t doing as well as he or she could be doing.
These people are attracted to you because you’re obviously doing something right. They’ll approach you looking for advice, business, money, referrals or all four.
Your first reaction may be to send them packing because you don’t have the time or the patience. But maybe you should take the time to hear them out.
Odds are, somewhere along your climb to success, someone helped you out in some way. Maybe it’s time you did the same by doing your part to help improve the local business climate.
Before you jump in to help, make sure you are in a position to do so. Don’t try to help someone if you need help yourself.
People are typically looking for one or more of the following.
- Advice. Sometimes all people really need is guidance from someone who knows more than they do or a push in the right direction. In this case, you’re just sharing the wisdom you’ve gained during your own growth process.
- Business. Often people are looking for you to do business with them. They have a product or service they think your successful company might benefit from. Give them a chance. Maybe they can provide a better price or service than your current supplier. A little business thrown their way can really make the difference between survival and failure.
- Referrals. If you can’t use their particular product or service, they may want you to refer friends and colleagues their way. If you trust they’ll do a good job, refer someone to them.
- Money. Depending on your relationship with the person, you may be comfortable loaning him or her money directly, bartering services or even taking some sort of ownership stake in return for cash. Be cautious about lending someone money, but if you believe in this person and his or her business, then it may be worth the risk.
There are many ways to help another business, but never offer to help someone who isn’t asking, because doing so can offend that person. Those who ask are already showing leadership by admitting they don’t have all the answers, so why not consider hearing what they have to say and seeing if you can lend them a helping hand.
FRED KOURY is president and CEO of Smart Business Network Inc. Reach him with your comments at email@example.com or (800) 988-4726.
Karen Cebreros sees herself as much more than a coffee developer and importer. After a trip to Peru in 1989, the founder and president of Elan Organic Coffees Inc. was inspired to help farmers save their land and improve the health of their families by teaching them how to implement healthy organic agricultural techniques. “My priorities were changing at the time,” Cebreros says. “I was 36 and had recently been diagnosed with a serious heart condition. I had a keen desire to make a lasting and meaningful difference during my lifetime.”
She’s doing that through her company, a coffee developer and importer of certified organically shade-grown coffees developed through partnerships with village co-ops in Central America, South America, Ethiopia and Papua New Guinea The company posted 2006 revenue of about $10 million.
Smart Business spoke with Cebreros about the importance of never giving up.
Q: How do you lead and manage change?
It all comes down to the people you employ. I hire for attitude and train for skills, which makes the job of leading change much easier. While change is always a challenge, with the right caliber of employee, it does not have to be an uphill battle. You can have a mediocre product, and if you have fantastic people, it will sell. Likewise, even the most excellent product will produce lukewarm results if you have an unmotivated staff.
Q: What key skills must a leader possess?
A willingness to be surrounded by people smarter than you. This includes not only employees but also business partners. Business owners tend to be headstrong and a bit stubborn. You need people on your team who will force you to listen and are not intimidated by your position.
This should go without saying, but you need to display the highest level of integrity and deal with people sharing the same value system.
The ability to get back up when you are knocked down is essential. As Winston Churchill said, ‘Never, never, never give up.’
Strong leaders must be nimble and willing to change direction when needed. They do not get attached to an outcome. When the circumstances change, you need to react accordingly.
Q: How do you make decisions?
Decisions are made by the group. We don’t hire clock-watchers our employees are the best and brightest. This allows me the luxury of stepping in only when there is an impasse.
I set the course for the business, but the business is certainly not all about me and what I think.
Making mistakes develops judgment, so I do not beat myself up over ‘failures.’ You can make many mistakes the key is in learning and not repeating them.
Consistency is often more important than being right. Do what you say, even if it is wrong. People must be able to rely on your word and not play guessing games.
Micromanagement does not work. Fortunately, it is not my style. For those leaders who tend to get overly involved, remember this you are not developing the skills of your staff. Micromanagement can be a strong demotivator.
Gut feeling or instinct cannot be underestimated. I do not go through a risk/reward analysis when I make decisions. It’s simply a matter of gathering the facts and moving forward on the information known at the time. You can always change directions if needed it’s important to at least keep moving.
HOW TO REACH: Elan Organic Coffees Inc., (619) 235-0392 or www.elanorganic.com
The commercial real estate industry has a dirty little secret, and it’s called conflict of interest.
We see the familiar “for lease” signs on buildings, and understand that those agents are working for the property owner. But when you are a CEO looking for a new building, things get murky. The conflicts are obvious when your agent also represents the building owner. But what about when the conflict is more subtle, or when you don’t find out?
Enter the tenant representative, who forsakes all landlord allegiances to represent only the tenant in commercial real estate transactions. Tenant representation has taken root in corporate America, where space users seek out tenant-only brokers and tenant-only brokerage firms have grown in response to this demand.
“We have divided the industry in half,” says John Jarvis, principal and senior vice president with Irving Hughes. “Brokers have to choose between representing landlords or tenants. The days of one agent doing both are gone.”
Smart Business spoke with Jarvis about what CEOs should know about engaging a tenant representative and how to benefit by having one.
What is tenant representation?
Tenant representatives are commercial real estate brokers who work exclusively for the tenant, or ‘space user,’ and never the building owner. ‘Tenant reps’ developed in response to the conflicts of interest that are rife in the industry. They are now a universally embraced, specialized sector of commercial brokerage, with a broader range of services focused on the tenants’ unique needs such as space programming, construction management, lease renewal consulting, site search, financial analysis and strategic negotiations.
Why should a CEO care if his broker is a tenant rep?
There is a very real risk of working with a partner who has blatant conflicts of interest. CEOs are sensitive to the issue of conflicts, and investment banking is a perfect example. As the CEO, you know when you are talking with a promoter, and you aren’t going to rely on him for business advice. Commercial real estate is exactly the same, and the landlord agents are the promoters.
I started in this industry as a traditional landlord’s broker 20 years ago, before the growth of tenant representation. I was given listings and told to go find tenants to fill the space. The objective was to get the buildings filled up at the highest rents, so that we could sell the properties as leased investments for the maximum possible price. But in the process of getting to know the tenants that would fill these buildings, I became aware of these insidious conflicts, and I’ve been a tenant representative since 1993.
How has tenant representation changed the industry?
In the old model, the landlords and their brokers held all the cards. The tenants were merely a means to an end. With the advent of tenant representation, the industry is waking up to the reality that the tenants actually hold all the cards, because the tenants pay the rent. In truth, landlords are utterly dependent on the rent tenants pay as their sole source of income.
The problem is that many tenants don’t realize they hold all the cards, and those that do understand aren’t always sure of the best way to play that winning hand.
What kind of savings can CEOs expect by using a tenant representative?
It is significant. For most companies, real estate is the second-largest expense after payroll, and every dollar we save goes right to the bottom line. But it isn’t just about the hard dollar savings. We are also mitigating risk and negotiating flexibility into our transactions, which can be extremely valuable.
Landlords will always look for the highest possible rent for the longest possible guaranteed duration. Tenants typically want the lowest possible rent and the greatest lease flexibility. So we get creative, develop our leverage, and negotiate solutions that work for our clients.
Is there resistance to tenant representation from the old-guard?
Absolutely there is. From the landlord’s perspective, we are educating customers and helping those customers to develop and use their leverage, resulting in lower rents, greater lease flexibility and more tenant-oriented protections and concessions. You can bet the landlord will try and keep us out of the mix. Also from the traditional brokers’ perspective, we are calling attention to their Achilles’ heel, the dual-agency conflict of interest when they try and represent tenants, and it’s an argument they can’t win.
Research has shown that companies with better information technology have more productive employees. Other research has shown that company growth can be positively influenced with outstanding information technology. Managers who have the most useful up-to-date information are in a position to make the best possible decisions in the shortest amount of time.
“Today’s businesses need to have a competitive edge,” says John Bugado, who had years of experience as an IT executive with NCR before becoming a department chair at National University in La Jolla. “They can get it with the infrastructure provided by new information technology that enables management to make quick decisions. The companies ‘fluent’ in these new technologies have harnessed the potential to be the most successful.”
Smart Business talked with Bugado about why fluency is important and how to become fluent.
What do you mean by being fluent in new technologies?
I am talking about the ability of the business side of the company being able to communicate to the IT people what they need in the way of information, and the IT people being able to communicate to the business side what they can and cannot do for them.
This fluent communication is a two-way street. Both sides need to understand the other’s needs and terminology, horizontally and vertically. If the IT side doesn’t understand what the business side needs and how it applies, how can they be expected to come up with solutions? If the business side doesn’t understand the value of information technology and its terminology, how can they realize its benefits and values?
While the IT side of a company is extremely important in today’s economy, it is neither more nor less important than the business side. What is most important is that both sides of the business are fluent in the new technologies and what they can do for the company.What’s the difference between horizontal and vertical fluency?
Horizontal fluency is being aware of the breadth of information technology and understanding how the technology best fits the business and related business processes. Once the overall IT architecture and the strategic roadmap is established, you then can drill down vertically into the details on how the technology works and how it is going to be applied.
How does a person become fluent in the new technologies?
One way is to read the various professional magazines, such as Computer World, Info World and Information Week. These professional publications study the issues in depth and then report on what is most important. They specialize in information such as Internet technologies, security technologies, wireless technologies and search technologies.
You could take courses that would help you become more fluent. Courses are available in technology management for business people and business courses for tech people. These will help bridge the communication gaps between business and technology analysts. Conferences can help you gain added insight. The networking and visiting between sessions at on-site conferences or classes can prove beneficial in increasing fluency. Some conferences are done as Web casts so you don’t even have to travel.
Other sources are search engines on the Internet. There are various tools that a good business person can use to keep up. The Internet is especially useful when you use ‘push’ technology to get what you need.
What do you mean by push technology?
Push technology is the opposite of pull technology, which is pulling information from the Internet or the local library. Push technology is developing a personal profile to indicate your specific technology interests and preferences. Based on the profile, search engines can filter through all the information in the Internet and push to you just what you need.
With so much information available on the Internet, it is increasingly important, and a time saver, to use push technologies.
Are there any other considerations?
There is a gap between keeping old and acquiring new technologies. The idea is to narrow the gap. You first need to be aware of how the old or current technology was being used by the business and then how to integrate the new into what you have. For example, new wireless technology uses the same basic business processes to connect and relate to customers and vendors. The difference is the flexibility and the availability of being more mobile.
Customers and vendors are demanding higher accessibility and availability. Constant evaluation and acquisition of new information technology within the business infrastructure will address these demands and narrow the gap between new and old technologies.
JOHN BUGADO is department chair at National University in La Jolla. Reach him at firstname.lastname@example.org or (858) 642-8407.
Extreme growth calls for extreme measures, says David Gilbert.
“Any time you’re in hypergrowth, people are usually asked to go above and beyond the call of duty,” says Gilbert, CEO of Five Point Capital, which provides equipment financing to small businesses. “Flexibility is crucial.”
And Gilbert understands growth. Since co-founding Five Point with president Dave Feder in 1999, the company’s revenue has grown to $12 million in 2005, a three-year growth rate of nearly 1,000 percent.
Smart Business spoke with Gilbert about learning from mistakes and why constantly improving can be as simple as knowing what needs to improve.
How do you communicate your vision to your staff?
We communicate monthly what the goals are for the next month. We communicate quarterly what the goals are for the next quarter. We have goal-setting at the beginning of the year as to what the goals are for the next year.
There’s constant measuring of goals throughout the organization. It could be simple stuff on the intranet to larger communications such as a quarterly meeting, and within the individual meetings, there’s a lot of communication as to what’s going on in terms of the vision of the organization.
We have an employee survey, and we found one of the top rankings at the organization was that the company felt that they understood the vision. That’s the result of constant reinforcement.
How did the employee survey benefit your company?
Our goal when we came up with the survey was to learn the good and the bad of the organization, and we wanted to make adjustments. The survey found a few shortcomings and couple of the key ones were benefits and training. It’s a fast-growing company.
When we started the company, we didn’t understand the value of benefits to the point that we should have. As our company became more dynamic, we needed to address those needs. With our hypergrowth, we didn’t support it with enough training. So we brought in a director of training to help support that.
Implementing training into this organization was our biggest growing pain. Because we’re growing so rapidly, we lacked the training that was needed to bring somebody to an all-star level. We didn’t focus on that enough.
We stretched too many people too thin. Training at all companies is really undervalued. People expect training to be done on a one-onone basis. People need to be better trained to do their job, and it needs to be continuous training. A lot of times, you do initial training and forget about the importance of continuous training.
How would you describe your leadership style?
We don’t want to micromanage here. We want people to feel that they should make and are capable of making a decision. If the decision turns out to be a bad one, justify why that decision was made.
If it all made logical sense and it was just a poor decision, that’s fine, but if there’s no basis and no rationale to make your decision, that’s another situation. Employees in general don’t like to be micromanaged.
They want to feel a sense of empowerment, entitlement and a sense that their opinion and what they do in their day-to-day activity matters, and it does matter and it’s reinforced all the time.
How do you learn from mistakes?
Usually if mistakes have occurred or we’re upset about a situation, we do a write-up as to what occurred. Why did we make the decision? What was the rationale behind the decision? Why did the performance not work? Was it a good or bad decision at the end of the day?
We reflect quite a bit to figure out what we could have done better. A lot of people don’t benchmark why they made that decision and what really occurred to get better in their decision-making. People learn from their experiences.
They learn from the good and the bad of what they do in their job on the leadership side and they constantly improve. That’s one of our core values.
How would you describe your company culture?
It’s a young, face-paced, innovative company, and when I say young, I mean young-hearted. The mindset is to constantly work on improving the organization. We have a really dedicated staff that understands part of our vision is to grow extremely rapidly.
In order to do that, it’s not your average person that’s going to work here. Certain people want stability and certain people want high-growth and that’s what they thrive on, so balancing the two is a tough challenge.
My partner and I started this company when we were 23 and 24, and we have an enormous vision to grow the company and we want our people to have that type of mindset. And without the leadership, it couldn’t occur. If you want a great company, it needs to start at the top.
HOW TO REACH: Five Point Capital, (800) 317-3404 or www.fivepointcapital.com
As children grow up, most parents attempt to instill in them that brothers and sisters need to share. It can be a complex concept to teach, and parents often gauge their success when arguments over toys cease and the siblings reach agreement on their own.
That lesson is probably adequate in most families, but in the McMillin household, the instruction had to be designed with the idea that the two sons might one day share the responsibility of overseeing one of California’s largest privately held real estate companies.
Today, Mark and Scott McMillin, co-CEOs of The Corky McMillin Cos., use their consensus-building skills daily. There’s been no time for sibling rivalry since they assumed the top positions at the firm following the death of their father, Corky McMillin, in September 2005.
That’s because the brothers took the helm of a diversified company that was in the midst of an aggressive plan to expand outside of the San Diego area. They had been in training for their respective CEO roles during the prior five-year period and were active participants in authoring and executing the expansion plan. “I think that the biggest thing that we had to do coming in to the role was that we had to be unified in our leadership,” says Scott McMillin. “We stayed strong, brought back the core principles that our company was founded on, and it’s been business as usual.”
The years they each spent in various positions learning the roots of the business helped the transition. “We didn’t just step in to the leadership role; we earned it, along with people’s respect,” says Mark McMillin. “I worked extremely hard the first six months because I thought that I had to be aware of everything that went on, and I have spent the last 10 months showing people that we can keep this on track.”
It’s a large operation to keep headed in the right direction. The company started in 1960 with less than $100,000 in annual sales. Today, The Corky McMillin Cos. is made up of five operating units, and the firm has constructed more than 20,000 homes, 16 mixed-use master planned communities, schools, shopping centers, business parks and 2,000 military residences in its 45-year history.
“But vacancy rates are not what they appear to be,” says David Marino, principal and executive vice president of The Irving Hughes Group. “We need to stop talking about vacancy rates and start talking about availability rates. Availability rates will show that the overall market is much softer than landlords and their brokers would have you believe.”
A smart CEO also needs to understand the broader picture including time on the market, sublease space and net absorption to pull together a more comprehensive view of the marketplace.
Smart Business interviewed Marino to see how CEOs can improve their company’s bottom line through negotiating more favorable lease rates and obtaining better concessions when leasing space.
Exactly why is availability the better measure of the market?
Vacancy rates are just that a measure of unoccupied space. However, when a company seeks facilities, it doesn’t look at vacant space, but rather at all of the space on the market what is available, and not what is vacant.
Vacancy rates provided by the same brokerage firms that are promoting landlords’ listings do not count available space due to pending relocations. The listing brokerage community also conveniently ignores sublease space, because that space is not technically vacant all 4.1 million square feet at least count, which is up from 3.3 million just a year ago.
The spread between vacancy and availability is extreme: Sorrento Mesa office vacancy is 14 percent, but availability is 26 percent; Carlsbad flex space is 19 percent, but availability is 24 percent; I-15 corridor office is 13 percent, but availability is 17 percent; I-15 corridor flex space is 21 percent, but availability is 27 percent. Another 5.2 million square feet are under construction in San Diego County a figure not captured in vacancy or availability rates. That all paints a pretty scary picture for landlords in 2007.
Time on the market is critical in residential real estate, but why is this first time a commercial real estate professional has mentioned it?
Time on the market is the commercial real estate industry’s dirty little secret. The real estate industry does not want tenants to know how long space has been on the market. The time during which landlords are sitting with space will determine the best strategy for negotiations. Most CEOs are stunned by the amount of time landlords have been sitting on vacant office space.
The reason space has sat is that there has been virtually no net absorption for more than a year. Net absorption is the net result of space being leased versus space being put vacated. Local companies are growing marginally, but the mortgage industry is dumping space county wide, as are big corporations such as Merck, Pfizer, Ericsson, Intel, Nokia, HP (formerly Peregrine Systems) and Avent (formerly Memec).
The market has been running in place for over a year, and it’s in long-term equilibrium. Although landlords have raised asking rental rates, there is no basis for inflation in rents.
What kinds of opportunities does this equilibrium offer a CEO?
The cost of space is a company’s second-largest fixed cost. With this excessive time on the market and the overhang of sublease space, CEOs should consider adjacent submarkets that have greater availability and seek sublease opportunities that can be had for 20 percent to 30 percent below market. These conditions will favorably affect the ability to negotiate lower cost lease renewals into 2007 and 2008.
What is the best strategy to optimize a lease expiration or expansion in 2007?
Engage professional representation to position your company with the landlord and shop the market to fully develop leverage and alternatives.
The most disastrous approach is to call the existing landlord, or his broker, to renew the lease. The landlord now knows you want to renew your lease, and because there is no representation involved, the landlord knows the tenant has no information about market conditions and no alternatives on the table for consideration. Landlords are in business to create return for their shareholders, and renewals directly with tenants have the highest ROI for landlords. The savings of 12 to 18 months of vacancy, $15 to $20 per square foot in tenant improvements, and the credit risk of finding a new tenant all become financial windfalls for the landlord in a direct renewal. Our objective is to obtain those savings for our client.
DAVID MARINO is principal and executive vice president of The Irving Hughes Group. Reach him at (619) 238-5672 or email@example.com.