REoptimizer^® Blog

If you’re part of a company who is constantly seeking to cut back on the most expensive aspects of operation, it's time to start looking at your corporate real estate portfolio.

As a major expense for most companies, evaluating occupancy costs throughout your corporate real estate portfolio can be the key to freeing capital and staying competitive. The strategies you use to manage your real estate expenditures depend on the remaining term of your lease or, for owned properties, how long you intend to remain in that location.

In 2008, the Financial Accounting Standards Board, which is the body responsible for GAAP -- the generally accepted accounting principles that govern American companies -- embarked on a project to conform its lease accounting standards to those of the International Accounting Standards Board. In August of 2014, this project suffered a major setback.

The United States is one of the only countries in the world to allow companies to choose the tax- and accounting-friendly operating lease treatment. When you treat your real estate leases as operating leases, you don't have to enter an asset on your balance sheet and you don't have to depreciate it. Instead, your only lease accounting task is to write off your payments as expenses as they occur. This lets you keep your organization lean and debt-free while also maximizing your tax write-offs.

Under the IASB standards used in the rest of the world, leases are usually treated as capital items. This means entering the value of the leased property on your balance sheet and accounting for your lease payments as a mixture of interest payments and depreciation. The capital lease treatment is on-balance sheet, complicated and is frequently tax-inefficient.

From 2008 through 2014, the FASB and the IASB worked together to find a way that the American standard could be brought closer to the international standard. They came up with the compromise of splitting leases into two broad camps. Type A leases were to be for equipment, while real estate leases would enjoy a special Type B treatment that would effectively be similar to the current operating lease structure, but not as favorable as the current style of lease accounting.

A transition to this system could have shifted the equation between leasing and buying space for many companies since leasing would end up being slightly less attractive than before. However, when the IASB scrapped the negotiation stating that it would only recognize the more stringent Type A lease rules, it essentially removed the impetus for the entire lease accounting reform process.

As of August 28, no one has announced that the negotiations between the IASB and FASB have been canceled. Nevertheless, with the two bodies now further apart in their views on how lease accounting should be conducted than they were before they started in 2008, it appears like any changes to how leases get treated here in the United States are, at best, years away. With this in mind, changing your corporate real estate strategy to conform to these rules' changing has ceased being necessary.

NOTE: This posting should not be treated as accounting advice. Given the extreme complexity of lease accounting, it is important that you contact a qualified accountant for assistance in understanding the tax and financial implications of any lease or purchase transactions.

One of the most important decisions to make in any corporate real estate strategy is when and how to renew a lease. Depending on how your lease is written, you could end up with a great deal of flexibility. On the other hand, even if your lease isn't written in a particularly generous fashion, you still have the option of attempting to renegotiate.

Stay or Go

The first corporate real estate strategy decision to make is whether to stay or to go. If you decide to go, it becomes important to review your lease to see if you can buy out of it more quickly. Even if you can't, if your landlord has a tenant that he can use to fill your space, he might be willing to let you out of your lease to avoid a future vacancy when your lease expires.

If your plan is to stay, it's also important to identify that as far up front as possible. That way, you have the time to potentially try to negotiate multiple times and get the best possible price and terms for your renewal.

Timing

Generally, an early request to renew telegraphs that you want your space. You might worry that showing your hand to your landlord could weaken your negotiating position. That's not really a concern, though. If you can't work out a good deal, you can always come back and negotiate later. This is especially the case if you are in a market where your landlord's position is weakening or if you have options that protect you.

Negotiating early may be desirable to your landlord, too. The benefit for your corporate real estate strategy -- stability -- also accrues to his. When you renew early, he knows that he can count on your rent for a longer period of time. Since you've been in your space for less time, he might also be able to save money by offering you a smaller TI allowance.

Waiting until the last second is a dangerous game. If you don't have an option to protect you, you could lose your space. On the other hand, if you are willing to move and have alternatives lined up, you could also end up in a strong negotiating position if your landlord needs you. Ultimately, it comes down to how much risk tolerance is built into your corporate real estate strategy.

A holdover clause that lets you stay in your space past the expiration of your lease also may make waiting until the last second a safer choice. That way, you know that you won't lose your place to do business. However, holdover clauses can be expensive and can be time-limited, so it is important to understand your rights before you get down to the wire.

Option vs. Renegotiation

When you are coming up on a renewal, options can be very helpful. An option usually guarantees your right to renew the space and gives you a pre-set rent level or terms for calculating your rent level. However, just because they bind your landlord to give you a certain offer doesn't mean that they bind you. If it is a better fit for your corporate real estate strategy, you can always choose not to take your option and, instead, negotiate a new lease with new terms with your landlord. The option binds him -- not you. Of course, if you choose to renegotiate from scratch, remember that you can only fall back on your option if it is still valid, so it can be important to pay close attention to its effective dates.

One of the most prominent ways to implement an environmentally responsible corporate real estate strategy is to install photovoltaic solar panels on top of your building. While adding them to your properties is a major statement, it isn't going to make a significant difference in your company's bottom line, or even in your carbon footprint in most parts of the country. Here are five things that you should - and shouldn't - expect from solar panels for your business:

Corporate real estate strategy doesn't move in lease cycles anymore. While many of the most important decisions in running a corporate portfolio occur when renewals come up, operating buildings requires real-time information. This kind of data can help companies decide which locations to open, which to close and where to make capital expenditures.

In addition to lease rollovers, anniversary dates are also important milestones in corporate real estate strategy. The arrival of CAM reconciliations from landlords or the completion of a yearly budget period for owned space allows corporate real estate directors to analyze property performance to determine if there are any issues that need to be dealt with. However, waiting for an entire year to analyze a building and its performance could lead to lags in decision-making. Here are some case studies of buildings where real-time reporting saved money, and some cases where a lagging corporate real estate strategy resulted in suffocating losses:

Choosing the right site is about much more than getting a great space for $32 a foot instead of $33. It's also about choosing a location that fits well with your broader corporate real estate strategy and with your company's marketing, product and financial strategies. All of these concerns make site selection a much more important and sensitive process than it might seem.