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Surplus Property StrategiesSurplus Property Strategies
David R. WorrellDavid R. Worrell
Managing DirectorManaging Director
Cambridge Consulting Group Inc.Cambridge Consulting Group Inc.
Course OutlineCourse Outline
In this course you will learn:In this course you will learn:
– How to How to developdevelop the surplus property plan the surplus property plan– How to How to analyzeanalyze the situation the situation– How to How to evaluateevaluate disposition alternatives disposition alternatives– How to How to marketmarket surplus properties surplus properties – How to How to closeclose the transaction the transaction– How to How to communicatecommunicate the plan to management the plan to management
© 2011 Cambridge Consulting Group Inc.
Developing the Surplus Property PlanDeveloping the Surplus Property Plan
Facts: Corporate dispositions will never stopFacts: Corporate dispositions will never stop
– The business cycleThe business cycle
– Business metamorphosisBusiness metamorphosis
– The “dual agenda” of corporate real estateThe “dual agenda” of corporate real estate
– How can you create value for your corporation?How can you create value for your corporation?
– How does your senior management determine value?How does your senior management determine value?
– Can you translate your work into measurable ($) results?Can you translate your work into measurable ($) results?
– From zero-sum game to value-addFrom zero-sum game to value-add
– The contingency mindset: you are paid for resultsThe contingency mindset: you are paid for results
© 2011 Cambridge Consulting Group Inc.
Developing the Surplus Property PlanDeveloping the Surplus Property Plan
The goal is to achieve the best possible returnThe goal is to achieve the best possible return
– The properties should be managed for maximum incomeThe properties should be managed for maximum income
– The properties represent significant capital investmentsThe properties represent significant capital investments
– Thorough due diligence is essentialThorough due diligence is essential
– You are the “control valve” in the processYou are the “control valve” in the process
Understand that value is a “perception”Understand that value is a “perception”
– You create valueYou create value
– Service providers save your time - therefore valueService providers save your time - therefore value
– Communicating the value is only as good as the information you sendCommunicating the value is only as good as the information you send
© 2011 Cambridge Consulting Group Inc.
Hidden Costs of Vacating LeaseholdsHidden Costs of Vacating Leaseholds
A disposition will trigger the write-down of unamortized capital A disposition will trigger the write-down of unamortized capital expenditures from previous projects. Do you have this information?expenditures from previous projects. Do you have this information?
Subleases establish legal and financial liability for security depositsSubleases establish legal and financial liability for security deposits
FASB 13 and “Materiality”:FASB 13 and “Materiality”:
– Subject to interpretation, there is a point when a leasehold Subject to interpretation, there is a point when a leasehold space is sufficiently vacated to force a trigger the write-down of space is sufficiently vacated to force a trigger the write-down of the remaining obligation associated with that space. Different the remaining obligation associated with that space. Different companies may have different standards for materialitycompanies may have different standards for materiality
Trigger of ADA requirementsTrigger of ADA requirements
Scrutiny of lease and past improvements by landlordScrutiny of lease and past improvements by landlord
© 2011 Cambridge Consulting Group Inc.
Prioritizing Surplus PropertiesPrioritizing Surplus Properties
Criteria for Prioritizing:Criteria for Prioritizing:
– The degree of negative cash flowThe degree of negative cash flow
– The book valueThe book value
– Potential for stemming lossesPotential for stemming losses
– Potential for generating cashPotential for generating cash
– Transaction easeTransaction ease
– Transaction speedTransaction speed
– Transaction costTransaction cost
– Accounting IssuesAccounting Issues
– Intangibles: Image, PR, and PoliticsIntangibles: Image, PR, and Politics
© 2011 Cambridge Consulting Group Inc.
Prioritizing Surplus PropertiesPrioritizing Surplus Properties
Weighted Rating MethodWeighted Rating Method– Immediate, short-term, long-term prioritizationImmediate, short-term, long-term prioritization
Marketable and will turn over quicklyMarketable and will turn over quickly
Offer the greatest financial returnOffer the greatest financial return
Uncomplicated, inexpensive to dispose ofUncomplicated, inexpensive to dispose of
Have significant impact on the balance sheet or income Have significant impact on the balance sheet or income statementstatement
– (Weighted rating matrix)(Weighted rating matrix)
© 2011 Cambridge Consulting Group Inc.
Developing Disposition GoalsDeveloping Disposition Goals
Financial Goals for Leased PropertiesFinancial Goals for Leased Properties
Financial Goals for Owned PropertiesFinancial Goals for Owned Properties
Facilities Management GoalsFacilities Management Goals
Process GoalsProcess Goals– Understanding the “Understanding the “psychology of the disposition processpsychology of the disposition process””
© 2011 Cambridge Consulting Group Inc.
Financial Goals for Leased PropertiesFinancial Goals for Leased Properties
Generate X dollars (present value) through Generate X dollars (present value) through sublease or assignment of Y propertiessublease or assignment of Y properties
Achieve X cents on the dollar for Y lease Achieve X cents on the dollar for Y lease termination coststermination costs
© 2011 Cambridge Consulting Group Inc.
Financial Goals for Owned PropertiesFinancial Goals for Owned Properties
Generate X dollars of Generate X dollars of liquidated equityliquidated equity from the from the salesale of Y of Y
propertiesproperties
Generate X dollars Generate X dollars cashcash over net book value from the over net book value from the salesale of of
Y propertiesY properties
Generate X dollars Generate X dollars cash-flowcash-flow through through leasingleasing Y owned Y owned
properties (including sale-leaseback's)properties (including sale-leaseback's)
SaveSave X dollars (present value) through X dollars (present value) through other transactionsother transactions
(gifting, exchanges, etc.)(gifting, exchanges, etc.)
© 2011 Cambridge Consulting Group Inc.
Facilities Management GoalsFacilities Management Goals
Increase net income (return) from the portfolio by:Increase net income (return) from the portfolio by:
– Increase occupancyIncrease occupancy– Tighten collection policiesTighten collection policies– Decrease operating expenses through improved Decrease operating expenses through improved
managementmanagement– Decrease debt service through re-financing:Decrease debt service through re-financing:
private - institutionalprivate - institutional
© 2011 Cambridge Consulting Group Inc.
Process GoalsProcess Goals
Secure your “empowerment” or authority to operateSecure your “empowerment” or authority to operate
Institutionalize the process and procedureInstitutionalize the process and procedure
– develop a policy and procedures manualdevelop a policy and procedures manual
Develop effective communication channels with legal, finance, Develop effective communication channels with legal, finance,
accounting and senior managementaccounting and senior management
Standardize service provider requirements and reporting formatsStandardize service provider requirements and reporting formats
Develop exceptional marketing materials and graphicsDevelop exceptional marketing materials and graphics
© 2011 Cambridge Consulting Group Inc.
Developing the Plan: SummaryDeveloping the Plan: Summary
Create and clarify your disposition philosophy:Create and clarify your disposition philosophy:
– Top priority will be given to reduce the amount of time needed to free Top priority will be given to reduce the amount of time needed to free the corporation’s capital from surplus property to redirect it to the core the corporation’s capital from surplus property to redirect it to the core business of the corporationbusiness of the corporation
– However, in the effort to reduce the amount of time needed, no short-However, in the effort to reduce the amount of time needed, no short-circuiting of planning, research and due diligence will occur in order to circuiting of planning, research and due diligence will occur in order to save money or get to marketsave money or get to market
– You are the corporation’s real estate You are the corporation’s real estate advisoradvisor : Be committed to : Be committed to infusing the disposition strategy and philosophy and process with your infusing the disposition strategy and philosophy and process with your corporate knowledge. Communicate confidence in dealing with corporate knowledge. Communicate confidence in dealing with “Monday morning quarterbacks”“Monday morning quarterbacks”
© 2011 Cambridge Consulting Group Inc.
Developing the Plan: SummaryDeveloping the Plan: Summary
Set priorities based on a complete research analysis of the Set priorities based on a complete research analysis of the entire portfolioentire portfolio
– Be results and bottom-line orientedBe results and bottom-line oriented– Every property is unique - do not institutionalize strategyEvery property is unique - do not institutionalize strategy– Give priority to properties where the best financial results Give priority to properties where the best financial results
can be achieved in the shortest period of time (80/20 rule)can be achieved in the shortest period of time (80/20 rule)– Set your priorities in context of their effect on the entire Set your priorities in context of their effect on the entire
portfolio (don’t miss the forest for the trees)portfolio (don’t miss the forest for the trees)– Communicate your goals regularly and effectivelyCommunicate your goals regularly and effectively
© 2011 Cambridge Consulting Group Inc.
Part II: Analyzing the SituationPart II: Analyzing the Situation
To initiate any surplus property plan, it is necessary to complete a To initiate any surplus property plan, it is necessary to complete a
situation analysis. This analysis should minimally contain:situation analysis. This analysis should minimally contain:
– Understanding the strategic concerns of the corporationUnderstanding the strategic concerns of the corporation
– Finance department input on the properties and their goalsFinance department input on the properties and their goals
– Local market conditions and historical valuesLocal market conditions and historical values
– Physical aspects of the surplus propertiesPhysical aspects of the surplus properties
– Environmental issues and regulationsEnvironmental issues and regulations
– Needs and circumstances of the operating unitNeeds and circumstances of the operating unit
– If leased, the Landlord’s circumstances and lease provisionsIf leased, the Landlord’s circumstances and lease provisions
– If owned, existing tenant circumstances and leasesIf owned, existing tenant circumstances and leases
© 2011 Cambridge Consulting Group Inc.
Financial Goal AnalysisFinancial Goal Analysis
The goals you develop in your surplus portfolio disposition The goals you develop in your surplus portfolio disposition plan provide a context for analyzing the situation - property plan provide a context for analyzing the situation - property by property. Begin your situation analysis by reviewing the by property. Begin your situation analysis by reviewing the major goals including:major goals including:
– Cash to be generatedCash to be generated– Occupancy costs to be saved or avoidedOccupancy costs to be saved or avoided– Tax benefits to be realizedTax benefits to be realized– Other balance sheet or income statement impacts realizedOther balance sheet or income statement impacts realized
© 2011 Cambridge Consulting Group Inc.
Discounted Cash Flow AnalysisDiscounted Cash Flow Analysis
The most important decision in any disposition analysis is the financial The most important decision in any disposition analysis is the financial
impact of a course of actionimpact of a course of action
– All decisions regarding inflows and outflows of cash must be brought All decisions regarding inflows and outflows of cash must be brought
into a present value analysis which is based on the time value of into a present value analysis which is based on the time value of
moneymoney
Principle:Principle:
– A dollar received today is worth more than a dollar received in the A dollar received today is worth more than a dollar received in the
future because of the interest you can earn in the interimfuture because of the interest you can earn in the interim
The “Best Approach” is a function of corporate objectivesThe “Best Approach” is a function of corporate objectives
– Either maximize the cash inflows at a given hurdle rateEither maximize the cash inflows at a given hurdle rate
– Or, minimize cash outflows and do all positive dealsOr, minimize cash outflows and do all positive deals
© 2011 Cambridge Consulting Group Inc.
Landlord Situation AnalysisLandlord Situation Analysis
Determine the Landlord type:Determine the Landlord type:
– Their motivations - Risk level - Direct requirementsTheir motivations - Risk level - Direct requirementsEntrepreneurEntrepreneurEntrepreneur with public moneyEntrepreneur with public moneyTraditional institutionTraditional institutionAggressive institutionAggressive institutionREITREITForeignForeign
Determine the owners investment type, cap rate, Determine the owners investment type, cap rate, and ROIand ROI
© 2011 Cambridge Consulting Group Inc.
Due DiligenceDue Diligence
What is required?What is required?
– All properties:All properties:GeneralGeneral
Accounting informationAccounting information
Environmental issuesEnvironmental issues
Compliance issuesCompliance issues
ADAADA
Title/Zoning IssuesTitle/Zoning Issues
© 2011 Cambridge Consulting Group Inc.
Due DiligenceDue Diligence
Leased Properties:Leased Properties:
– Lease informationLease information– Capital or OperatingCapital or Operating– Accounting treatment of free rent/allowances, etc..Accounting treatment of free rent/allowances, etc..– Landlord consentsLandlord consents– Use restrictionsUse restrictions– Subtenant rightsSubtenant rights– Amendments, side letters, paper trailAmendments, side letters, paper trail
© 2011 Cambridge Consulting Group Inc.
Owned Property Goal AnalysisOwned Property Goal Analysis
Possible transactions:Possible transactions:
– Convey the property as a wholeConvey the property as a whole– Lease the propertyLease the property– Conduct a sale-leasebackConduct a sale-leaseback– Create a tax-deferred exchangeCreate a tax-deferred exchange– Donate the propertyDonate the property
© 2011 Cambridge Consulting Group Inc.
Owned Property AnalysisOwned Property Analysis
Goals of the Sale:Goals of the Sale:– Closing target date:Closing target date: July 15July 15– Net proceeds:Net proceeds: $2,000,000$2,000,000– Net gain over book value:Net gain over book value: $200,000$200,000
Goals of the lease-back:Goals of the lease-back:– Closing target date:Closing target date: August 29August 29– Cash from sale:Cash from sale: $2,000,000$2,000,000– Change in occupancy cost:Change in occupancy cost: +$50,000+$50,000– ($275,000 new lease costs - $225,000 old lease costs)($275,000 new lease costs - $225,000 old lease costs)
© 2011 Cambridge Consulting Group Inc.
Leased Property AnalysisLeased Property AnalysisPossible transactions:Possible transactions:– Re-negotiate the original lease to reduce size and expensesRe-negotiate the original lease to reduce size and expenses– Sublease the propertySublease the property– Assign the propertyAssign the property– Negotiate a lease buy-outNegotiate a lease buy-out– Do nothingDo nothing– ““Go dark”Go dark”– Pay the entire remaining amountPay the entire remaining amount
Possible shortcomings of each alternativePossible shortcomings of each alternative
© 2011 Cambridge Consulting Group Inc.
Leased Property AnalysisLeased Property Analysis
Remaining lease obligation:Remaining lease obligation: 5 years5 years
Remaining annual payments:Remaining annual payments: $300,000$300,000
Sublease goal:Sublease goal: $200,000 annual income$200,000 annual income
Termination goal:Termination goal: $1,000,000 payment$1,000,000 payment
– (Discount rate = 8%)(Discount rate = 8%)
© 2011 Cambridge Consulting Group Inc.
Surplus Property AnalysisSurplus Property Analysis
Corporate Strategy/PrioritiesCorporate Strategy/Priorities
– The corporation’s priorities may include:The corporation’s priorities may include:
Financial vs. operational impactFinancial vs. operational impact
Short-term vs. long-term impactShort-term vs. long-term impact
Negotiable vs. non-negotiable requirementsNegotiable vs. non-negotiable requirements
© 2011 Cambridge Consulting Group Inc.
Owned Property with Outside TenantsOwned Property with Outside Tenants
Some corporate properties have outside tenants in the same Some corporate properties have outside tenants in the same facility with the corporation under separate lease or ownership facility with the corporation under separate lease or ownership situationssituations
Possible Transactions:Possible Transactions:
– Sell the propertySell the property– Move and lease the operating units space to a third partyMove and lease the operating units space to a third party– Sell the property & lease back space for the operating unitSell the property & lease back space for the operating unit
© 2011 Cambridge Consulting Group Inc.
Building Situation AnalysisBuilding Situation Analysis
Determine if the building is profitableDetermine if the building is profitableDetermine the vacancy ratioDetermine the vacancy ratioDetermine the velocity and turn-over in the buildingDetermine the velocity and turn-over in the buildingGet a list of every tenant and determine financial strengthGet a list of every tenant and determine financial strengthIs the tenant supply ample or poorIs the tenant supply ample or poorDoes the building have is own brokerageDoes the building have is own brokerageHow much money was spent on tenant improvementsHow much money was spent on tenant improvementsWhat deals are presently being offered by the buildingWhat deals are presently being offered by the buildingHow is the buildings competition - what are they offeringHow is the buildings competition - what are they offering
© 2011 Cambridge Consulting Group Inc.
Physical Aspects AnalysisPhysical Aspects Analysis
The property, the improvements, the characteristics and especially the The property, the improvements, the characteristics and especially the
location must be assessed to determine:location must be assessed to determine:
– the property’s salability, leasability, or subleasabilitythe property’s salability, leasability, or subleasability
– necessary physical improvements or repairs that will be required to bring necessary physical improvements or repairs that will be required to bring
the property to disposition standardsthe property to disposition standards
– incurable economic obsolescence - and its value effectsincurable economic obsolescence - and its value effects
– possible title defects affecting marketabilitypossible title defects affecting marketability
© 2011 Cambridge Consulting Group Inc.
Market EvaluationMarket Evaluation
Local market conditions and trends will determine the financial results Local market conditions and trends will determine the financial results and timetable of each disposition. The key is to have the most accurate and timetable of each disposition. The key is to have the most accurate data to use along side the disposition specialist.data to use along side the disposition specialist.
– The primary objectives of the market evaluation are to:The primary objectives of the market evaluation are to:
Ascertain and validateAscertain and validate the property’s value for the purpose of the property’s value for the purpose of establishing asking prices and rents establishing asking prices and rents
– Market rents, sublease rents, leasing terms, and improvement Market rents, sublease rents, leasing terms, and improvement allowances guide the terms of a leasehold dispositionallowances guide the terms of a leasehold disposition
– Appraised market value and market capitalization rates guide Appraised market value and market capitalization rates guide the terms of a fee dispositionthe terms of a fee disposition
© 2011 Cambridge Consulting Group Inc.
Market EvaluationMarket Evaluation
Confirm or challengeConfirm or challenge targeted (or guessed) closing targeted (or guessed) closing dates and the time period envisioned for marketing a dates and the time period envisioned for marketing a propertyproperty
– Surplus portfolio disposition plans are strongly impacted by Surplus portfolio disposition plans are strongly impacted by variations in local supply/demand conditionsvariations in local supply/demand conditions
EducateEducate corporate management as to the economic corporate management as to the economic realities surrounding the surplus disposition plan, and realities surrounding the surplus disposition plan, and what results they should expect (managed what results they should expect (managed expectations)expectations)
© 2011 Cambridge Consulting Group Inc.
Balance Sheet and Shareholder DataBalance Sheet and Shareholder Data
Tax Implications:Tax Implications:
– Since the disposition of surplus property can create a major tax event Since the disposition of surplus property can create a major tax event
which your corporation may want to avoid or delay, the potential capital which your corporation may want to avoid or delay, the potential capital
gain or loss which would be realized must be calculated and gain or loss which would be realized must be calculated and
communicatedcommunicated
– Taxable capital gain or loss is calculated by subtracting the net book Taxable capital gain or loss is calculated by subtracting the net book
value from the net proceeds of the salevalue from the net proceeds of the sale
Price Earnings Ratio (P/E):Price Earnings Ratio (P/E):
– Expresses the perceived relationship between a company’s value and Expresses the perceived relationship between a company’s value and
its earnings, as indicated by the price of the stock and the company’s its earnings, as indicated by the price of the stock and the company’s
earnings per shareearnings per share
© 2011 Cambridge Consulting Group Inc.
(c) 2011 Cambridge Consulting Group (c) 2011 Cambridge Consulting Group Inc.Inc. 3232
IAS 17 – The Capitalization of All LeasesIAS 17 – The Capitalization of All Leases
Balance Sheet and Shareholder DataBalance Sheet and Shareholder Data
Balance Sheet and Shareholder DataBalance Sheet and Shareholder Data
Example:Example:
– At many companies, it is an accepted practice to At many companies, it is an accepted practice to apply the P/E ratio to occupancy costs eliminated apply the P/E ratio to occupancy costs eliminated by the disposal of surplus properties in order to by the disposal of surplus properties in order to determine the true overall financial impact to the determine the true overall financial impact to the corporation. The theory is that every dollar of corporation. The theory is that every dollar of savings equals a dollar of after-tax earnings.savings equals a dollar of after-tax earnings.
© 2011 Cambridge Consulting Group Inc.
Situation Analysis: SummarySituation Analysis: Summary
Your analysis of the entire situation will provide you with the Your analysis of the entire situation will provide you with the framework and the information necessary to develop framework and the information necessary to develop alternative (as opposed to standard) transaction scenarios.alternative (as opposed to standard) transaction scenarios.
All portfolio and single property alternatives must be All portfolio and single property alternatives must be considered within the context provided by a thorough considered within the context provided by a thorough understanding of the strategic goals and financial concerns of understanding of the strategic goals and financial concerns of the corporation.the corporation.
The needs and goals of senior management must be The needs and goals of senior management must be completely understood as well as the tactical needs of each completely understood as well as the tactical needs of each affected business unit.affected business unit.
© 2011 Cambridge Consulting Group Inc.
Part III: Evaluating AlternativesPart III: Evaluating Alternatives
After analyzing the situation, you are in a position to evaluate After analyzing the situation, you are in a position to evaluate
and compare alternative disposition scenarios. The evaluation and compare alternative disposition scenarios. The evaluation
of alternatives requires:of alternatives requires:
– Knowledge of the Knowledge of the mechanicsmechanics of all alternatives of all alternatives– Ability to Ability to analyze the financial aspectsanalyze the financial aspects of all alternatives of all alternatives– Ability to assess how the Ability to assess how the time value of money affectstime value of money affects the the
financial results of the alternativesfinancial results of the alternatives– Ability to apply Ability to apply relevant decision-making criteriarelevant decision-making criteria to to
alternatives in order to identify the optimum strategyalternatives in order to identify the optimum strategy
© 2011 Cambridge Consulting Group Inc.
Decision ModelingDecision Modeling
Focusing on obtaining the optimal financial outcome does Focusing on obtaining the optimal financial outcome does not necessarily mean getting the highest price for the not necessarily mean getting the highest price for the property, but rather achieving the best results in terms of property, but rather achieving the best results in terms of earnings and balance sheet effects earnings and balance sheet effects
Financial evaluation of dispositions can be reduced to the Financial evaluation of dispositions can be reduced to the “Three T’s”:“Three T’s”:
– TimingTiming:: of the closingof the closing– TermsTerms:: of the transactionof the transaction– TypeType:: of transactionof transaction
© 2011 Cambridge Consulting Group Inc.
Disposition Decision ModelDisposition Decision Model
SITUATION ANALYSIS CIRCUMSTANCES
FINANCIAL EVALUATION OF ALTERNATIVES
Timing Terms Type
Financial model for transaction type
Best financial scenario
NON-FINANCIAL EVALUATION OF ALTERNATIVES
Feasibility Strategic compatibility Risk
SELECTION OF ALTERNATIVES
© 2011 Cambridge Consulting Group Inc.
Disposition Decision ModelDisposition Decision Model
As the decision model suggests, conclusions drawn from the As the decision model suggests, conclusions drawn from the situation analysis provide the context for strategy situation analysis provide the context for strategy development. The next step is to “crunch the numbers” for development. The next step is to “crunch the numbers” for various combinations of the “Three T’s” using a financial various combinations of the “Three T’s” using a financial model appropriate to the transaction.model appropriate to the transaction.
At this point, the alternatives must be compared with respect At this point, the alternatives must be compared with respect to:to:– Risk involvedRisk involved– Likelihood that events will happen as plannedLikelihood that events will happen as planned– The corporation’s prioritiesThe corporation’s priorities
© 2011 Cambridge Consulting Group Inc.
Financial ModelingFinancial Modeling
Financial models enable the disposition manager to estimate Financial models enable the disposition manager to estimate the financial impacts of various transactions.the financial impacts of various transactions.
To identify the financial effects of a possible disposition, To identify the financial effects of a possible disposition, measurable consideration must be given to:measurable consideration must be given to:
– Earnings saved by elimination of lease or owning costsEarnings saved by elimination of lease or owning costs– Capital gain or loss incurred on the disposition of the Capital gain or loss incurred on the disposition of the
propertyproperty– One-time costs required to complete the dispositionOne-time costs required to complete the disposition– The combined impact of the aboveThe combined impact of the above
© 2011 Cambridge Consulting Group Inc.
Financial Impact Models for Financial Impact Models for DispositionsDispositions
Case IllustrationCase Illustration
Operating Expense EliminationOperating Expense Elimination
Capital Gain/Loss from DispositionCapital Gain/Loss from Disposition
Cost of DispositionCost of Disposition
Net Impact on EarningsNet Impact on Earnings
SummarySummary
© 2011 Cambridge Consulting Group Inc.
Financial Impact ModelFinancial Impact Model
A corporation owns a building that has become surplus.A corporation owns a building that has become surplus.– The current corporate tenants will be relocated for $50,000The current corporate tenants will be relocated for $50,000– The building has a net book value of $700,000The building has a net book value of $700,000– Annual carrying costs are $125,000Annual carrying costs are $125,000
The corporation leases additional parking next to the building.The corporation leases additional parking next to the building.– The lease has 5 years remaining on the termThe lease has 5 years remaining on the term– The annual rental payments are $ 25,000The annual rental payments are $ 25,000
The building is sold for $1,000,000.The building is sold for $1,000,000.– Commissions and closing costs are $75,000Commissions and closing costs are $75,000
The CRE manager negotiates a buyout of the lease for $100,000.The CRE manager negotiates a buyout of the lease for $100,000.– The brokerage commission is $25,000The brokerage commission is $25,000
The corporate tax rate is 35%.The corporate tax rate is 35%.
© 2011 Cambridge Consulting Group Inc.
Financial Impact ModelFinancial Impact Model
Section 1: Operating Expense EliminationSection 1: Operating Expense Elimination
1.1. Discount rate:Discount rate: 7%7%2.2. Net Lease/own expense eliminated by year:Net Lease/own expense eliminated by year:
Year 1:Year 1: ________________________________Year 2:Year 2: ________________________________Year 3:Year 3: ________________________________Year 4:Year 4: ________________________________Year 5:Year 5: ________________________________
3.3. PV total @ 7%:PV total @ 7%: ________________________________4.4. Total pre-tax lease/own exp. eliminated:Total pre-tax lease/own exp. eliminated: ________________________________5.5. Tax effect (35%):Tax effect (35%): ________________________________
6.6. After-tax lease/own expense eliminated:After-tax lease/own expense eliminated:
© 2011 Cambridge Consulting Group Inc.
Financial Impact ModelFinancial Impact Model
Section 2: Capital Gain/Loss from DispositionSection 2: Capital Gain/Loss from Disposition
1.1. Sale price:Sale price: ____________________2.2. Sale expenses:Sale expenses: ____________________
3.3. Net proceeds:Net proceeds: ____________________4.4. Net book value of asset:Net book value of asset: ____________________
5.5. Pre-tax gain/loss:Pre-tax gain/loss: ____________________6.6. Tax effect:Tax effect: ____________________
7.7. After-tax capital gain/loss:After-tax capital gain/loss: ____________________
© 2011 Cambridge Consulting Group Inc.
Financial Impact ModelFinancial Impact Model
Section 3: Cost of DispositionSection 3: Cost of Disposition
1.1. Applicable relocation costs:Applicable relocation costs: ____________________2.2. Lease buyout:Lease buyout: ____________________3.3. Closing costs & commission:Closing costs & commission: ____________________4.4. Marketing expense:Marketing expense: ____________________5.5. Other:Other: ____________________6.6. Total cost of disposition:Total cost of disposition: ____________________7.7. Tax effect:Tax effect: ____________________8.8. After-tax cost of disposition:After-tax cost of disposition: ____________________
© 2011 Cambridge Consulting Group Inc.
Financial Impact ModelFinancial Impact Model
Section 4: Net Impact on EarningsSection 4: Net Impact on Earnings
1.1. Operating expense eliminated:Operating expense eliminated: ____________________
2.2. Capital gain/loss on disposition:Capital gain/loss on disposition: ____________________
3.3. Cost of disposition:Cost of disposition: ____________________
4.4. Net impact on corporate earnings:Net impact on corporate earnings: ____________________
5.5. Shares outstanding:Shares outstanding: 5,000,0005,000,000
6.6. Earnings impact per share:Earnings impact per share: ____________________
© 2011 Cambridge Consulting Group Inc.
Lease DispositionsLease Dispositions
SubleaseSublease– Remain as obligorRemain as obligor– Middleman effectMiddleman effect
AlterationsAlterationsRepairsRepairsConsentsConsentsRemoval at end of termRemoval at end of termHoldoverHoldoverInsuranceInsuranceContinuos operationContinuos operation
– Approval processApproval process– Profit potentialProfit potential– Ramifications of eachRamifications of each
© 2011 Cambridge Consulting Group Inc.
Lease DispositionsLease Dispositions
What are Favorable Conditions to Sublease?What are Favorable Conditions to Sublease?
– Very positive market conditionsVery positive market conditions– ““Sandwich Lease” possible Sandwich Lease” possible – Space is marketable (conforming use)Space is marketable (conforming use)– Quality subtenants availableQuality subtenants available– Corporation is willing and has capacity to manage spaceCorporation is willing and has capacity to manage space– Remaining lease term is long enough to recover Remaining lease term is long enough to recover
improvement and transaction costsimprovement and transaction costs
© 2011 Cambridge Consulting Group Inc.
Lease DispositionsLease Dispositions
Assignment:Assignment:
– In an assignment, the tenant (assignor) transfers the In an assignment, the tenant (assignor) transfers the entirety of their leasehold obligations to a replacement entirety of their leasehold obligations to a replacement tenant (assignee)tenant (assignee)
– The assignee becomes The assignee becomes primarilyprimarily responsible for the responsible for the rental obligationrental obligation
– The assignor is STILL secondarily responsibleThe assignor is STILL secondarily responsible– The assignor does not make income from a “sandwich The assignor does not make income from a “sandwich
lease”lease”– Ramifications of eachRamifications of each
© 2011 Cambridge Consulting Group Inc.
Lease DispositionsLease Dispositions
What are favorable conditions for Assignment?What are favorable conditions for Assignment?
– Very positive market conditionsVery positive market conditions– Space is marketable (conforming use)Space is marketable (conforming use)– Quality subtenants availableQuality subtenants available– If qualifies to release financial reservesIf qualifies to release financial reserves
© 2011 Cambridge Consulting Group Inc.
Lease DispositionsLease Dispositions
Lease TerminationsLease Terminations
– Eliminates obligationEliminates obligation– Highest cost alternativeHighest cost alternative– No riskNo risk– No commissionNo commission– No management time neededNo management time needed– No time delayNo time delay– Ramifications of eachRamifications of each
© 2011 Cambridge Consulting Group Inc.
Lease DispositionsLease Dispositions
What are the favorable conditions for a Lease Termination?What are the favorable conditions for a Lease Termination?
– Remaining term is too short to justify the costs and effort to Remaining term is too short to justify the costs and effort to
find a subtenant or assigneefind a subtenant or assignee
– Leasing market is strongLeasing market is strong
– Market rents are rising above the present contract rentMarket rents are rising above the present contract rent
– Landlord bases value on cost of re-letting versus rentLandlord bases value on cost of re-letting versus rent
– Corporate finance prefers to recognize (rather than defer) Corporate finance prefers to recognize (rather than defer)
capital gain or loss - materialitycapital gain or loss - materiality
© 2011 Cambridge Consulting Group Inc.
Fee DispositionsFee Dispositions
As-Is SaleAs-Is Sale
– Favorable Conditions:Favorable Conditions:
CompanyCompany:: wants immediate dispositionwants immediate disposition
PropertyProperty:: marketable condition and locationmarketable condition and location
FinancialFinancial:: no compelling reason for capital infusion; no compelling reason for capital infusion;
expense coverage to retain expense coverage to retain
occupantsoccupants
MarketMarket:: sufficient demand for type of spacesufficient demand for type of space
TimeframeTimeframe:: immediate and short-termimmediate and short-term
GeneralGeneral:: no obvious financial return for rehabilitation no obvious financial return for rehabilitation
or re-positioningor re-positioning© 2011 Cambridge Consulting Group Inc.
Lockdown and SellLockdown and Sell
– Favorable Conditions:Favorable Conditions:
CompanyCompany:: stop the support, unload at any coststop the support, unload at any costPropertyProperty:: poor condition; no foreseeable return poor condition; no foreseeable return for for added improvementadded improvementFinancialFinancial:: expenses of operating do not justify expenses of operating do not justify rent rent or continued useor continued useMarketMarket:: poorpoorTimeframeTimeframe:: undeterminable; poor present undeterminable; poor present prospectsprospects
Fee DispositionsFee Dispositions
© 2011 Cambridge Consulting Group Inc.
Fee DispositionsFee Dispositions
Improve and SellImprove and Sell
– Favorable Conditions:Favorable Conditions:
CompanyCompany:: willing to invest capital; optimize net willing to invest capital; optimize net proceedsproceeds
PropertyProperty:: competitive property; needs some work, but competitive property; needs some work, but
has obvious potential for increased rentshas obvious potential for increased rents
FinancialFinancial:: promising return for investment in terms of promising return for investment in terms of
rent or tenant typerent or tenant type
MarketMarket:: improvement will place property in market improvement will place property in market
conforming useconforming use
TimeframeTimeframe:: long-term, flexiblelong-term, flexible
© 2011 Cambridge Consulting Group Inc.
Fee DispositionsFee Dispositions
Lease-Up and SellLease-Up and Sell
– Favorable Conditions:Favorable Conditions:
CompanyCompany:: desires maximum asset return; willing to desires maximum asset return; willing to
invest capital; willing to manageinvest capital; willing to manage
PropertyProperty:: competitive property; strong potential for competitive property; strong potential for
increases in occupancy and rent ratesincreases in occupancy and rent rates
FinancialFinancial:: capital available for marketing and capital available for marketing and
improvements; existing rents provide good improvements; existing rents provide good
expense coverage - possibly a returnexpense coverage - possibly a return
MarketMarket:: favorable leasing conditionsfavorable leasing conditions
TimeframeTimeframe:: long-termlong-term
© 2011 Cambridge Consulting Group Inc.
Fee DispositionsFee DispositionsAuctionAuction– Types:Types:
AbsoluteAbsoluteMinimum BidMinimum BidMinimum Bid with Reserve PriceMinimum Bid with Reserve Price
– Favorable Conditions:Favorable Conditions:CompanyCompany:: wants out; net proceeds not as critical as wants out; net proceeds not as critical as
deadline; prefer as-is sales to leasing or deadline; prefer as-is sales to leasing or upgradeupgradePropertyProperty:: similar to other auctioned properties similar to other auctioned properties FinancialFinancial:: not a pivotal factornot a pivotal factorMarketMarket:: weak leasing and selling conditionsweak leasing and selling conditionsTimeframeTimeframe:: near-termnear-termGeneralGeneral:: unpredictabilityunpredictability
© 2011 Cambridge Consulting Group Inc.
Exchange (Section 1031)Exchange (Section 1031)
An exchange is a tax-deferrable transaction by which a seller trades An exchange is a tax-deferrable transaction by which a seller trades one property for another “like-kind” investment. If the transaction is one property for another “like-kind” investment. If the transaction is in accordance to IRS rules - capital gain is not realized as a taxable in accordance to IRS rules - capital gain is not realized as a taxable event. Instead, the gain is transferred to the other exchange event. Instead, the gain is transferred to the other exchange property.property.
– Favorable Conditions:Favorable Conditions:
CompanyCompany:: desiring disposition but willing to make a desiring disposition but willing to make a qualifying investment in interimqualifying investment in interim
PropertyProperty:: generic use generic use FinancialFinancial:: significant gains tax exposuresignificant gains tax exposureMarketMarket:: strong or weakstrong or weakTimeframeTimeframe:: near-termnear-termGeneralGeneral:: unpredictability - complicatedunpredictability - complicated
© 2011 Cambridge Consulting Group Inc.
GiftingGifting
– Favorable Conditions:Favorable Conditions:
CompanyCompany:: opportunity to recover tax loss - produce opportunity to recover tax loss - produce goodwillgoodwill
PropertyProperty:: not easy to dispose of by other meansnot easy to dispose of by other means
FinancialFinancial:: book values loss not a factor; company book values loss not a factor; company desires tax benefitdesires tax benefit
MarketMarket:: available donee organizationavailable donee organization
TimeframeTimeframe:: near-termnear-term
© 2011 Cambridge Consulting Group Inc.
Ground LeaseGround Lease
Favorable Conditions:Favorable Conditions:
CompanyCompany:: amenable to long-term role as property amenable to long-term role as property investor; may need land in futureinvestor; may need land in future
PropertyProperty:: under-utilized and developable; under-utilized and developable; marketable marketable location for future uselocation for future use
FinancialFinancial:: provides income streamprovides income stream
MarketMarket:: increasing highest and best use near increasing highest and best use near location; growth arealocation; growth area
TimeframeTimeframe:: long-termlong-term
© 2011 Cambridge Consulting Group Inc.
Sale-LeasebackSale-Leaseback
Favorable Conditions:Favorable Conditions:
CompanyCompany:: can use cash; still needs use of propertycan use cash; still needs use of property
PropertyProperty:: continues to suit company needscontinues to suit company needs
FinancialFinancial:: provides cash infusion, realize a capital provides cash infusion, realize a capital tax tax benefit, reduced risk (?), possible benefit, reduced risk (?), possible leasehold leasehold deductions (?) deductions (?)
MarketMarket:: not pivotalnot pivotal
TimeframeTimeframe:: long-termlong-term
© 2011 Cambridge Consulting Group Inc.
Non-Financial EvaluationNon-Financial Evaluation
It is important to communicate three components of It is important to communicate three components of the financial comparison of alternatives to senior the financial comparison of alternatives to senior management.management.
$
Value Saved Gain/Loss
Cash Spent
© 2011 Cambridge Consulting Group Inc.
Non-Financial EvaluationNon-Financial Evaluation
FeasibilityFeasibility
– Expediency vs. transaction valueExpediency vs. transaction value
Strategic compatibilityStrategic compatibility
– Sublease for income vs. terminate at high cash Sublease for income vs. terminate at high cash outlayoutlay
© 2011 Cambridge Consulting Group Inc.
RiskRisk
– Renter’s ability to payRenter’s ability to pay– Market ConditionsMarket Conditions– Physical and Environmental ConditionsPhysical and Environmental Conditions– Business ConditionsBusiness Conditions– CompetitorsCompetitors– Adverse Public RelationsAdverse Public Relations
© 2011 Cambridge Consulting Group Inc.
Evaluating Alternatives: SummaryEvaluating Alternatives: Summary
From the financial perspective, the “Three T’s” need to be From the financial perspective, the “Three T’s” need to be seriously considered:seriously considered:
– Is the Is the timingtiming right taking into consideration the time value right taking into consideration the time value
of money?of money?
– Is the Is the typetype of transaction appropriate for the situation? of transaction appropriate for the situation?
– Are the Are the termsterms of the transaction appropriate for the of the transaction appropriate for the
situation?situation?
© 2011 Cambridge Consulting Group Inc.
SummarySummary
What are the results of the four-part financial analysis?What are the results of the four-part financial analysis?
– Expenses eliminatedExpenses eliminated– After tax capital gain or lossAfter tax capital gain or loss– After tax cost of cash outlays to complete the dispositionAfter tax cost of cash outlays to complete the disposition– Combined impact of the aboveCombined impact of the above
Net impact on earningsNet impact on earnings
Earnings impact per shareEarnings impact per share
© 2011 Cambridge Consulting Group Inc.
SummarySummary
There are three non-financial factors to be There are three non-financial factors to be considered in evaluating alternatives:considered in evaluating alternatives:
– Is it feasible?Is it feasible?
– Is it consistent with the corporation’s strategic Is it consistent with the corporation’s strategic priorities and with the overall surplus disposition?priorities and with the overall surplus disposition?
– What are the risks?What are the risks?
© 2011 Cambridge Consulting Group Inc.
Marketing Surplus PropertyMarketing Surplus Property
Marketing Objectives and ForecastMarketing Objectives and Forecast
– It must be consistent with corporate strategy for dispositionsIt must be consistent with corporate strategy for dispositions
– It should incorporate understanding of the data you collected and It should incorporate understanding of the data you collected and due diligence as part of the situation analysisdue diligence as part of the situation analysis
– It should incorporate understanding of the data you collected as It should incorporate understanding of the data you collected as part of the financial and non-financial analysispart of the financial and non-financial analysis
– The objectives you develop for a property should state the The objectives you develop for a property should state the expectations for financial outcome, closing data, necessary expectations for financial outcome, closing data, necessary resources and costs, and type of transactionresources and costs, and type of transaction
© 2011 Cambridge Consulting Group Inc.
Developing the Marketing StrategyDeveloping the Marketing Strategy
The marketing strategy answers the following questionsThe marketing strategy answers the following questions
– What are the benefits and selling points of the property?What are the benefits and selling points of the property?– What type of buyer or tenant will purchase or lease the What type of buyer or tenant will purchase or lease the
property?property?– What are their buyer values?What are their buyer values?– How will the segment be reached?How will the segment be reached?– How will the selling message be packaged and delivered?How will the selling message be packaged and delivered?– Who will do the work?Who will do the work?– How much will the marketing effort cost?How much will the marketing effort cost?
© 2011 Cambridge Consulting Group Inc.
Property Benefits and Selling PointsProperty Benefits and Selling Points
The situation analysis assessed the property, the tenants, and The situation analysis assessed the property, the tenants, and the market. That assessment should reveal the property’s the market. That assessment should reveal the property’s strengths and weaknesses. These strengths become selling strengths and weaknesses. These strengths become selling themes of the marketing plan.themes of the marketing plan.
A selling theme shows how a targeted buyer or lessee can A selling theme shows how a targeted buyer or lessee can benefit from the property through understanding their buyer benefit from the property through understanding their buyer values.values.
Can an “artificial market” be created to serve a sense of Can an “artificial market” be created to serve a sense of urgency and greed in the market?urgency and greed in the market?
© 2011 Cambridge Consulting Group Inc.
Selling ThemesSelling Themes
Examples of property strengths that might become selling Examples of property strengths that might become selling themes:themes:
– Virtues of the locationVirtues of the location– Positive trends in the areaPositive trends in the area– Quality of the available spaceQuality of the available space– Amenities of the facility or areaAmenities of the facility or area– Infrastructure of the marketInfrastructure of the market– Economics of occupancyEconomics of occupancy– Space availability declining Space availability declining
© 2011 Cambridge Consulting Group Inc.
Matching the Property Profile to Buyer Matching the Property Profile to Buyer ValuesValues
Developing a profile of the most probable prospects and their Developing a profile of the most probable prospects and their buyer values for the surplus property is a critical part of buyer values for the surplus property is a critical part of successful marketing.successful marketing.
– What type of user wants the space?What type of user wants the space?– What does this type of user value in their space?What does this type of user value in their space?– Does the user have a sense of urgency?Does the user have a sense of urgency?– What is the user’s likely business?What is the user’s likely business?– How large is the company likely to be?How large is the company likely to be?– Where are the located?Where are the located?
© 2011 Cambridge Consulting Group Inc.
Reaching the MarketReaching the Market
There are two general methods:There are two general methods:
– Selling Activity:Selling Activity:
Phone callsPhone calls
Door to door salesDoor to door sales
Open housesOpen houses
PresentationsPresentations
Special eventsSpecial events
EntertainingEntertaining
© 2011 Cambridge Consulting Group Inc.
Reaching the MarketReaching the Market
Promotional activity:Promotional activity:
– Direct mailDirect mail
– FlyeringFlyering
– Trade publication adsTrade publication ads
– Classified adsClassified ads
– Open housesOpen houses
– Property brochure handoutsProperty brochure handouts
– Press releasesPress releases
– SignageSignage
© 2011 Cambridge Consulting Group Inc.
Marketing MixMarketing Mix
Complex propertiesComplex properties
PortfoliosPortfolios
Specialized usageSpecialized usage
Broad vs. targeted marketsBroad vs. targeted markets
SchedulingScheduling
Property Promotion PackageProperty Promotion Package
© 2011 Cambridge Consulting Group Inc.
Marketing BudgetMarketing Budget
Brokerage commissionBrokerage commission
Promotional feesPromotional fees
Payroll allocations for staff timePayroll allocations for staff time
Environmental auditsEnvironmental audits
Legal expenses for document review and consultationLegal expenses for document review and consultation
Physical improvements - cleaningPhysical improvements - cleaning
AppraisalsAppraisals
InspectionsInspections
Averages between 10 and 20% including the commissionAverages between 10 and 20% including the commission
© 2011 Cambridge Consulting Group Inc.
The Disposition TeamThe Disposition Team
Who should do the work? (who should not?)Who should do the work? (who should not?)
How should the work be divided?How should the work be divided?
How should the players be compensated?How should the players be compensated?
Potential Team:Potential Team:– InternalInternal– ConsultantConsultant– Local BrokerageLocal Brokerage– National BrokerageNational Brokerage
© 2011 Cambridge Consulting Group Inc.
The Disposition TeamThe Disposition Team
Who should do the work?Who should do the work?– PrioritizingPrioritizing– Developing Financial GoalsDeveloping Financial Goals– Developing Process GoalsDeveloping Process Goals– Financial AnalysisFinancial Analysis– Due DiligenceDue Diligence– Market EvaluationMarket Evaluation– Decision ModelingDecision Modeling– Financial ModelingFinancial Modeling– Management PresentationManagement Presentation
© 2011 Cambridge Consulting Group Inc.
The Disposition TeamThe Disposition TeamTeam member strengths and weaknessesTeam member strengths and weaknesses
Motivation of each memberMotivation of each member
Qualification of each memberQualification of each member
Past training and processesPast training and processes
What information should be received from each What information should be received from each member?member?
What action should be expected from each member?What action should be expected from each member?– InternalInternal– ConsultantConsultant– Local BrokerageLocal Brokerage– National BrokerageNational Brokerage
© 2011 Cambridge Consulting Group Inc.
Screening and Selecting a Service Screening and Selecting a Service ProviderProvider
The best service provider in a market is the one most The best service provider in a market is the one most likely to satisfy the unique requirements of your situation. likely to satisfy the unique requirements of your situation. How do you find this person and company?How do you find this person and company?
– Technical expertise of dispositionsTechnical expertise of dispositions– Track record for dispositionsTrack record for dispositions– Percent disposition activity to acquisitionsPercent disposition activity to acquisitions– Present obligations and accountsPresent obligations and accounts
Does size matter?Does size matter?– Locally, Nationally , previous work, or expertise?Locally, Nationally , previous work, or expertise?
© 2011 Cambridge Consulting Group Inc.
Client-Service Provider RelationshipClient-Service Provider Relationship
The listing or consulting agreement establishes the legal and The listing or consulting agreement establishes the legal and financial relationship between client and service provider. A financial relationship between client and service provider. A listing agreement specifies:listing agreement specifies:
– The service provider’s responsibilitiesThe service provider’s responsibilities– The service provider’s fiduciary relationship to the principalThe service provider’s fiduciary relationship to the principal– The principal party’s authorizationThe principal party’s authorization– The compensation and what constitutes earned The compensation and what constitutes earned
compensationcompensation– The expiration dateThe expiration date
© 2011 Cambridge Consulting Group Inc.
Identifying Service Provider Identifying Service Provider ResponsibilitiesResponsibilities
Clarification is key:Clarification is key:
– Marketing and direct selling: what will be done, by whom, when?Marketing and direct selling: what will be done, by whom, when?
– Activity documentationActivity documentation
– Reporting responsibilities: level of detail, schedule, formatReporting responsibilities: level of detail, schedule, format
– Marketing expenses: who pays for what, approvals, monitoringMarketing expenses: who pays for what, approvals, monitoring
– Qualifying authority: can service provider de-select prospects?Qualifying authority: can service provider de-select prospects?
– Negotiations: parameters, service provider authorityNegotiations: parameters, service provider authority
– Performance assessments: who and whenPerformance assessments: who and when
– Post contract responsibilities: who is responsible for what?Post contract responsibilities: who is responsible for what?
© 2011 Cambridge Consulting Group Inc.
Managing the Marketing ProcessManaging the Marketing Process
The corporate real estate executive has the most strategic The corporate real estate executive has the most strategic
role in the disposition process. Their actions determine the role in the disposition process. Their actions determine the
success or failure of any disposition program.success or failure of any disposition program.
Developing the process flow chartDeveloping the process flow chart
– To develop the deadlines - view the process backwards To develop the deadlines - view the process backwards from closing to inceptionfrom closing to inception
– Be prepared to change strategies - several times!Be prepared to change strategies - several times!
© 2011 Cambridge Consulting Group Inc.
Marketing Surplus Property: SummaryMarketing Surplus Property: Summary
The first step in developing a marketing plan is to:The first step in developing a marketing plan is to:
– Define the objectives and forecastDefine the objectives and forecast– Identify corporate goals with regard to financial outcomes, Identify corporate goals with regard to financial outcomes,
time frames, transaction types, terms, and the overall time frames, transaction types, terms, and the overall budgetbudget
– Set the marketing strategy:Set the marketing strategy:
Identify the property's benefitsIdentify the property's benefits
Use this analysis to target prospects or buyer typesUse this analysis to target prospects or buyer types
Develop the marketing process for promotional and Develop the marketing process for promotional and selling campaignsselling campaigns
© 2011 Cambridge Consulting Group Inc.
Presentations to Senior ManagementPresentations to Senior Management
Know what senior management cares about and Know what senior management cares about and wants to seewants to see
At the approval stage, develop your presentation in At the approval stage, develop your presentation in terms of how your recommendation measures terms of how your recommendation measures against the corporation’s objectivesagainst the corporation’s objectives
Don’t waste time and facts or opinions that no one in Don’t waste time and facts or opinions that no one in the room except you may care about - Be Focused!the room except you may care about - Be Focused!
© 2011 Cambridge Consulting Group Inc.
Presentations to Senior ManagementPresentations to Senior Management
Generally, senior management wants to Generally, senior management wants to know how the transaction will affect:know how the transaction will affect:
– The reserveThe reserve– Earnings (quarterly and annually)Earnings (quarterly and annually)– The balance sheetThe balance sheet– The budgetThe budget
© 2011 Cambridge Consulting Group Inc.
Presentations to Senior ManagementPresentations to Senior Management
Is senior management truly ready for this process?Is senior management truly ready for this process?– There is a reversal of roles since the acquisition:There is a reversal of roles since the acquisition:
Strength to weaknessStrength to weakness
Should you as a corporate manager negotiate directly?Should you as a corporate manager negotiate directly?– You represent money to the landlordYou represent money to the landlord– The landlord is honor bound to refuse ANY offer you makeThe landlord is honor bound to refuse ANY offer you make
Will local brokerage “fight”a landlord on your behalf?Will local brokerage “fight”a landlord on your behalf?– They must remain in the local market with the landlordThey must remain in the local market with the landlord– They will have to continue to attempt to earn commissions They will have to continue to attempt to earn commissions
from that landlordfrom that landlord
© 2011 Cambridge Consulting Group Inc.
Presentations to Senior ManagementPresentations to Senior Management
Know the “hot buttons” of senior management.Know the “hot buttons” of senior management.
Hot buttons typically include:Hot buttons typically include:
– Reducing occupancy expense from a prior periodReducing occupancy expense from a prior period– Get the property completely off the booksGet the property completely off the books– Maximize sale proceeds to cover some carrying Maximize sale proceeds to cover some carrying
costs of the remaining portfoliocosts of the remaining portfolio
© 2011 Cambridge Consulting Group Inc.
Presentations to Senior ManagementPresentations to Senior Management
Use Corporate Language!Use Corporate Language!
– Covert cost per square foot to total annual dollar costs, or total dollar Covert cost per square foot to total annual dollar costs, or total dollar
costs over the lease term (discounted)costs over the lease term (discounted)
– Be cautious about terms such as “stops”, “pass-through’s”, “TI’s”, or Be cautious about terms such as “stops”, “pass-through’s”, “TI’s”, or
“loss factors”“loss factors”
– Use common corporate measures such as “percent change”, Use common corporate measures such as “percent change”,
“favorable variance”, and “dollars as a percent of sales”“favorable variance”, and “dollars as a percent of sales”
– Discuss book value versus market value of assetsDiscuss book value versus market value of assets
– Convert proceeds from the disposition into contribution to earnings , Convert proceeds from the disposition into contribution to earnings ,
earnings per share, and shareholder value (the P/E ratio).earnings per share, and shareholder value (the P/E ratio).
© 2011 Cambridge Consulting Group Inc.
Presentations to Senior ManagementPresentations to Senior Management
Present assumptions when forecasting impactsPresent assumptions when forecasting impacts
– Market conditions and trendsMarket conditions and trends– methods and numbers used to calculate capitalized methods and numbers used to calculate capitalized
figures, after-tax figures, and discounted figuresfigures, after-tax figures, and discounted figures
GIVE SENIOR MANAGEMENT THE REPORT GIVE SENIOR MANAGEMENT THE REPORT - THE WAY THEY WANT IT!- THE WAY THEY WANT IT!
© 2011 Cambridge Consulting Group Inc.
Closing the Transaction: SummaryClosing the Transaction: Summary
Have a strategy in place for obtaining approvalsHave a strategy in place for obtaining approvals
– Make sure you know exactly which approvals are required and Make sure you know exactly which approvals are required and
how to get them how to get them
– Don’t OVER approve each itemDon’t OVER approve each item
– In presenting recommendations, provide the information the In presenting recommendations, provide the information the
company cares about in the form the company expects to company cares about in the form the company expects to
receive itreceive it
Communicate thoroughly and clearly with the appropriate people at Communicate thoroughly and clearly with the appropriate people at
the right times, both inside and outside the corporationthe right times, both inside and outside the corporation
© 2011 Cambridge Consulting Group Inc.
“The trouble with the future is that it usually arrives before we are ready for it”
Arnold H. Glason
© 2011 Cambridge Consulting Group Inc.
The True Cost of SubleasingThe True Cost of Subleasing
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2001 2002 2003 2004 2005
Owners Perception of Value All Other Expenses
Rent
•Owners consider the full value of your lease only the contract rent•Therefore, 35% of our obligation is overlooked in negotiations•A sublease or new tenant costs the Owner up to $35 per square foot to engage
Owners usually only concern themselves with Contract Rent
© 2011 Cambridge Consulting Group Inc.
Components of Rent
$6.90 $6.90
$7.00 $7.00
$2.55
$0.64
$0.76$1.47
$2.50$9.70
$4.58
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
Renewal Relet
Debt Service: Operating Expenses:
Tenant Finish: Transaction Costs:
Opportunity Costs: Cash Flow / ROE:
© 2011 Cambridge Consulting Group Inc.
Effect of Over-pricing your SubleaseEffect of Over-pricing your Sublease
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2001 2002 2003 2004 2005
Over-pricing cancels value Your Rent
Market Value
Brokers asking RentBrokers asking Rent
Value of Rent to MarketValue of Rent to Market
$10
$6
$8
© 2011 Cambridge Consulting Group Inc.
Effect of Lower-pricing your SubleaseEffect of Lower-pricing your Sublease
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007
Start offer below market value Your Rent
Market Value
Value of Rent to MarketValue of Rent to Market
Lower asking Rent
Preserved Value
$6
© 2011 Cambridge Consulting Group Inc.