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How to Screw Up an Acquisition

 

 

Acquisitions often focus on just a handful of items: synergy, talent, perhaps geographic coverage and/or technology, and revenue of course. The investment bankers and attorneys that orchestrate the deal generally do a great job of ferreting out the business issues that need resolved. Except for the real estate. Read more

 

When companies acquire or merge with other competing or complementary firms, real estate is, as a part of the transaction, generally a small overall concern. However, we frequently see major risk being absorbed by the acquiring firm with potential for a very negative surprise down the road. Read more

multiple real estate locations

 

Any corporation with more than one office/branch/site is large enough to have real estate portfolio objectives. With just a handful of locations, the C-level executives are likely very hands-on in determining the best solution as real estate opportunities or decisions present themselves. Once the number of sites grows to a point where that oversight is delegated though – whether placed under the responsibility of another staff member such as Regional VP’s, Controller, VP of Finance, General Counsel, or a dedicated Director of Real Estate – there are three styles that the management can typically be classified under: Read more

key performance metrics

 

Every business has a learning curve as it grows, and the collective wisdom learned along the way becomes an invaluable knowledge base.  This is especially true in regard to your facility strategy.  By analyzing  what was done right and what could be improved in each new location or lease renewal process, you can develop rules to achieve the greatest return and avoid pitfalls. Read more

operating expense pass through

I’m not crazy about condominiums.  Here’s why:  Other people (the condo association – which is often controlled by a very small group of individuals) get to vote on how to spend your money.  Some of those choices may not add value for you or to your property.  Operating expenses on leased commercial property work the same way.  The management company, which is the property ownership or someone under their direct control, gets to decide what expenses get passed through to the property tenants.  So what expenses do they pass through?  Every single one that they can possibly get away with.  There are only two methods of protection for tenants, and I’d estimate that more than half of all leases don’t fully take advantage of them. Read more

One of the easiest and most effective ways for a corporation to keep real estate costs low is to regularly perform Market Rate Audits on their leased locations.  Often many companies get caught up in reactionary tasks such as simply handling leases as they come up for expiration, so they never get ahead of the curve with a proactive approach. Read more

By Ed Harris
(Editors Note:  Ed Harris is VP of Commercial Tenant Services, a NYC-based auditing firm that specializes in corporate lease review. We hope you enjoy this guest article.)

Few areas hold as much impact on capital outlay as real estate and leasehold expenses. Ensuring that your company is not overpaying is integral to fiscal management.

  1. Significant Jumps in Operating Expenses / Additional Rent
    Performing a simple trend analysis of your year-to-year operating expense obligation is a must. And while inflationary and market forces generally create an escalating building operating expense profile, when you see a marked jump in expenses issued to you, a red flag should rise. Causes of significant jumps might include new and potentially lease impermissible capital projects, new expense categories not reflected in your base year, new contracts or vendor changes and/or related party issues, and newly increased or above standard services which are not reflected in your base year.
  2. Change in Property Ownership / Property Manager
    A change in property ownership or property management should always trigger a lease audit. Property management changes create a very real risk of affecting accounting category integrity which is integral to an apples-to-apples comparison to your base year level. Management fee levels and composition, related party vendors, and changing service levels are also common building operating expense issues when a building changing ownership or management. Another potential trap fall in a building transaction is the tenant estoppel which, if not carefully worded, has the potential to sign away rights or leverage. Finally, once a building changes hand, future audit finds and recoveries may become complicated should overcharges be identified in years under previous ownership.
  3. Building Undergoing Capital Improvements or Renovations
    If you are walking into your building and notice construction – audit your landlord. Renovations and capital projects may be subject to your lease operating expenses exclusions, and every project should be audited for permissibility under your lease. And while you are most likely obligated to reimburse the landlord for a true building operating cost, you probably are not obligated to reimburse your landlord for increasing the value of his/her building if it does not reduce building operating costs in the future. And if your building had undergone renovations and/or capital improvements in past and unaudited years, it may not be too late. Those costs were most likely amortized across future years, and there may still be an opportunity for avoid ongoing expenses if they prove to be impermissible per your lease exclusions.
  4. Your Lease is Commencing / Expiring
    Perhaps the most valuable times to have a lease audit performed are at the commencement and expiration of your lease. If you occupy under a base year lease, the valuation of your base year will have material impact on your leasehold expenses throughout the term of the lease. It is in your direct interest to both validate all charges in Year One, and to validate expense levels so as to not undervalue your base year. Likewise, lease audits should always be performed as a standard practice at any lease expiration. Not only might you lose rights to recoup any overcharges after vacating the premises (audit windows), you may lose significant leverages after your move. Lease audits and the potential uncovering of over- or mischarges may also have a material impact on any lease renewal negotiations and construction of lease amendment/renewal language.
  5. Sizable Shifts in Building Occupancy Levels
    Accounting for accurate building occupancy levels is integral to an accurate gross up methodology and can have enormous implications to your operating expenses obligation. This can be significantly magnified vis-à-vis fixed versus variable occupancy-level driven expenses should the vacancy rate in your building be sizable. And of course it directly benefits the fiscally conscious tenant to ensure that occupancy shifts are accurately reflected within a given expense period.
  6. No or Limited Backup Supplied to Annual Reconciliation Statements
    Just as you would not accept your credit card statements if they did not itemize your charges, accepting an annual reconciliation on face value is fiscally unwise. Yearend reconciliations can carry significant and lease term long financial impact – particularly if your lease terms include caps or index-driven escalators. And any failure to timely challenge a landlord’s computations and/or inclusions may forfeit your rights thereafter per potential audit windows as discussed above. Accepting a rudimentary reconciliation, even one broken down to expenses per billing category is to trust your company’s finances to an outside party with a vested interest in maximizing its profits. Whenever an annual reconciliation crosses your real estate department’s desk without sufficient back up to verify expenses and calculations, a lease audit should automatically be triggered.
  7. Building or Landlord is in Financial Straits
    While it might not always be obvious, it is in a tenant’s best interests to periodically inquire into a building and its owner’s financial wellbeing. These are difficult financial times, and few sectors have been hit as hard as commercial real estate. Commercial Tenant Services (CTS) has uncovered multiple examples of landlords in difficult financial straits materially overcharging their tenants. And while we would never suggest that such a situation directly underlies the overcharge in any specific example, the coinciding of the two – a landlord in financial distress and overcharges to its tenants – can be a recurring theme.

It is important to remember that auditing your landlord issued expenses is your right. It is sound fiscal practice and required compliance protocol in many of the most efficiently run companies in the North American markets. Lease audit has become commonplace, and chances are your landlord has been audited by its tenants many times before your inquiry. Nowadays, landlords expect to be lease audited and have generally already prepared for your call.

Edward Harris is the co-founder of Commercial Tenant Services and has over twenty-five years of real estate finance and lease audit experience. Mr. Harris holds degrees in physics and engineering from Columbia University, and an MBA joint degree in Real Estate Finance and Operations Research from the Graduate School of Business at Columbia University.

We have a rule for our real estate project management process:  No Surprises.

Typically our clients are either doing a major construction project to build out or expand their business space, relocating to another facility, or both.  Usually these are operations critical to providing their products or services to their customers.

So what happens when a freak storm like Hurricane Sandy arises well after the usual season, misses the tropical coast, and heads for New Jersey & New York?  Isn’t that a surprise to everyone?  Well, no.

Here’s why:  Stuff Happens.

Of course we could not predict that particular storm, but you don’t need to anticipate every possible scenario. You simply need to realize that Stuff Happens and have a contingency plan in place in case something occurs that will prevent you from executing on your plan.

Perhaps it’s a labor strike, bankruptcy of a contractor, fire, failure of a piece of equipment, unanticipated code or licensing violation, even death of a key team member.  All undesirable and unfortunate, but, from your customer’s perspective the show must go on.

Have a plan in place to deal with how you will handle unavoidable delays.  We’ve found that there are three key components to keeping your project moving forwardas anticipated, or at least with the absolute minimum disruption possible:

  1. Be Proactive – If even a hint of trouble is brewing, communicate with staff, property owners, contractors and other team members to discuss how to handle and respond immediately as problems occur.  Know operational alternatives: Can product ship from another location or staff lease temporary office space in another property?
  2. Establish Relationships in Advance – The time to look for a roofer is not after the hurricane has passed through town.  Know who you can use, talk to them in advance, and assemble your back-up response team before your project starts.
  3. Experience Counts – Staff the project with people that have experience commensurate to the importance of the project.  If you deliver mission-critical products or services, or a delay of the project puts a multi-million dollar contract at risk, don’t put a relocation/construction newbie in charge no matter how competent they are at running your [Fill in Blank] division.  Get someone who has been through many of the same situations before.  They may not anticipate a Hurricane Sandy, but they will know how to deal with seemingly insurmountable issues. A couple of those seem to happen on every major project, don’t they? No surprise there.