Business owners must balance numerous responsibilities to ensure their company is operating at peak efficiency. Real estate is an obligation that often falls on the priority list in favor of more pressing concerns. But when it’s put off for too long, it can cause problems, says Bill Saltzman, SIOR, CCIM, executive vice president and director of office services at Cushman & Wakefield/CRESCO Real Estate.
“When real estate is not your core business, it’s often viewed simply as a place to house your company,” he says. “But you need to craft a plan so that both you and the key leaders in your organization understand how real estate supports your core business.”
Smart Business spoke with Saltzman about managing your company’s real estate obligations.
Where do business leaders get themselves into trouble with real estate matters?
Today businesses seek to do more with fewer people, so down time is exceedingly rare. When it comes to real estate concerns, it is critical to allow enough time to plan and evaluate all of the important issues. As a tenant, you are well-advised to begin the review process with sufficient lead time. Otherwise, you run the risk of making this important decision in a vacuum or under duress. Leases often contain a holdover provision. Generally, upon lease expiration, the tenant may only remain in the premises on a month-to-month basis, and the rent can double. If you don’t go about making these decisions in a methodical and organized process, you can certainly run into trouble.
How do you develop a methodical process?
Make sure you know the commencement date and the expiration date of your lease. Develop a schedule as to when you’ll sit down with your internal team to evaluate your needs. In most companies, multiple parties need to weigh in on this process. For example, the CFO is looking at your space and lease terms from a financial perspective. Human resources may view real estate needs from the perspective of attraction and retention of employees. And the CEO may focus on corporate image and branding and will try to assess real property in the context of what the competition is doing.
It’s important to determine how decisions are made. Make sure there is consensus in terms of the role real estate plays within your organization and specific goals and objectives to be considered in any expansion or relocation. Once these basic discussions are completed, seek the advice of a professional to guide you and your team with issues such as timeline, budget, market conditions, economic incentives and needs analysis.
What motivates a business to evaluate its real estate options?
One approach is to break these options down into qualitative and quantitative factors. Qualitative is about attracting and retaining top talent. It’s the building’s proximity to a skilled workforce and the demographic you seek. You also look at amenities, signage, parking availability and cost, and access to public transportation as well as the benefits of the property itself.
Does it have required technology, acceptable views, food service, fitness or other amenities that are important to you? How well is the building maintained? Is it a comfortable place to do business? Quantitative is the value proposition. This is not just rent, but total occupancy cost, a combination of the rent, utility expenses, space utilization and efficiency, tenant improvements and other elements that make up what is paid on an annualized basis. What are you getting for your occupancy dollar?
How do you know if your occupancy cost is too high?
Total occupancy cost depends upon a number of factors including, but not limited to, the type of lease agreement between the parties, the effective rate (which is calculated after taking into account incentives, abatement etc.), escalation expense ‘pass-throughs’ and amortization of tenant improvements. With the assistance of a tenant advocate to provide you with detailed market information about trends and the occupancy cost of comparable properties, you should obtain a solid perspective of your cost on an ‘apples-to-apples’ NPV basis to determine whether or not you are paying too much. ●
Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate.